Corporate governance and the global financial crisis
- Executive summary
- Corporate governance
- Objectives of corporate governance
- The Madoff case
The first part of this report discusses the nature of corporate governance, its objectives and good practices. Issues around risk taking, board structure, remuneration or inadequate monitoring are tackled with the global Financial Crisis as a backdrop.
The Organization for Economic Co-operation and Development (OECD) principles for corporate governance are examined, especially the areas where they proved insufficient in safeguarding against the stock market meltdown.
The last part of this paper studies Madoff Securities which collapsed after a web of fraudulent activities were exposed. The scam illustrates corporate government lapses and the deficiency of regulation authorities at that time.
[...] 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 need for a corporate government process arises from two sources: the separation of ownership from management and the varying views by cultures of who the stakeholders are and their relative significance (Carpenter 2004) Objectives of corporate governance It is a specific corporate objective to generate growing earnings and dividends with as much certainty as possible for shareholders (Adam & Schwartz 2009). Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and should facilitate effective monitoring (OECD steering group 2004). [...]