CORPORATE GOVERNANCE

“No punishment has ever possessed enough power of deterrence to prevent the commission
of crimes. On the contrary, whatever the punishment, once a specific crime has appeared for
the first time, its reappearance is more likely than its initial emergence could ever have been”.
(Source: Hannah Arendt)

1.0 Introduction

Homo sapiens, have forgotten their very principle of survival ever since the dawn of
capitalism and free enterprise economy. Man, by virtue of being a social animal, by
necessity realized even during the caveman era that living together in a group was the
best form of security for survival and to sustain the way of life. The very idea of living
was centered upon nurturing the group interest in order for the individual to live and
survive. However, over the passage of human civilization, such social purpose which
was the very element of survival faded giving way for individualism and self-gratification.
Today, human beings have become very individualistic, egoistic and materialistic and to
the extent of trivializing the importance of society and its continued survival.

Across the globe, many societies have witnessed continual financial scandals among
corporations due to unethical and illegal behaviour of those individuals who were
entrusted with the responsibility of stewardship, resulting in disastrous consequences to
the organization in particular and the society as a whole, (refer figure 1 – list of global
major financial scandals).

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 Enron
Scandal
2003

WorldCom
1 MDB Scandal
Scandal 2002

USD 78 B
2014

Global Lehman
Satyam Brothers
Scandal USD 1.5 B Corporate USD 639 B
Scandal
2009 Scandals 2008
USD 14 B

Toshiba
Siemens
Scandal
Scandal
2015
2008

BCCI
Scandal
1991

Source: Quinn, (2017); Tran, (2002); Media report, (2017); media report, (2015);
Bowers, (2012); Suzuki, (2015); media report, (2015);

Figure 1: List of Global Corporate Scandals

These events go to enliven the saying of Mahatma Gandhi “the earth has everything to
satisfy the needs of man but not his greed”. It is a diametrically opposing situation
where men have become so greedy and highly self-centered where they are failing to
nurture and preserve the interest of societies as a whole. The emergence of such
pattern heralds the wider economic malaise that is yet to besiege the society in later
years. Therefore the need for effective corporate governance in the contemporary era

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needs no further emphasis as it is inevitable to avoid financial, legal and ethical pitfalls
for the continued survival of the corporations to satisfy its existence for social purpose.

1.1 Emergence of Capitalism and its Implications.

“One day Deng Xiaoping decided to take his grandson to visit Mao. “Call me granduncle,”
Mao offered warmly. “Oh, I certainly couldn’t do that, Chairman Mao,” the awe-struck child
replied. “Why don’t you give him an apple?” Suggested Deng. No sooner had Mao done
so than the boy happily chirped, “Oh thank you, Granduncle.” “You see,” said Deng, “what
incentives can achieve.” (“Capitalism,” 1984, p. 62).

Source: Eisenhardt (1989)

How did we arrive at this situation? It was at the tail-end of sixteenth and early
seventeenth century in Europe where capitalism emerged and took centre stage in
open-market economy. It involves an economic system where investment and
ownership of businesses are maintained mainly by corporations or private individuals.
And today it has become a dominant economic system in the modern world (Nemetz,
2013). At the onset of capitalism, businesses were small and the basic forms of
business organizations were sole proprietors, later as business grew more funding and
resources were needed to manage and sustain business. As a result partnership
businesses evolved followed by companies. The end of the eighteenth century saw the
origin of chartered companies and corporations. As businesses grew into corporations,
there was an imminent need for investors (private individuals) (Eisenhardt1, 1989) to
engage management professionals to manage the business on behalf of them. In the
context of corporate governance, this was the turning point in the corporate business
world.

Ownership and management control of the business were the two fundamental issues
that were central to a firm then which led to the emergence of “Agency Theory”
identifying the rights and responsibilities of the investors/owners and the management
body (Eisenhardt2, 1989). Refer figure 2 for the illustration of the conception of a firm,
followed by the discussion on the implications of agency theory upon the firm.

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 Principle / Shareholder

Accountable

Carried out on
behalf of Agent / Directors

Task
Manage Organization

Source:

Figure 2: The Conception of a Firm

1.2 Implications of the Agency Theory

Critical issues of Debate in Corporate Governance

The most significant feature of the concept of corporate governance is the Agency
theory and its attendant characteristics. From figure above, it can be inferred that a firm
subscribes to various elements to conceptualize the firm. The functional direction and
control of these elements is facilitaed by the creation of relationships and
responsibilities among the elements involved. Generally corporate governance relies on
two significant factors in agency theory; first corporations or firms are reduced to two
participants namely managers and shareholders whose interests are assumed to be
both clear and consistent and second humans are self-interested.

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Hence, the shareholders of the firm, assumes the role of principal and employs agents
(managers) to manage the organizational tasks thus creating a relationship. Due to the
complexity of the organization inevitably evolves the separation of responsibilities
between the principal and agent. Thus, the principal assumes ownership of the
business and the control of the business is delegated to the agent.

This is where the conflict of interest arises which in turn leads to the misalignment of
goals between the two parties. Generally the principal has a long term vested interest in
his business. However, the agent not being the owner but an employee, usually does
not have long term interest and commitment to the firm. Besides the agent being the
specialist in the business management and the principal being the financier, gives rise
to an assymetric information and monitoring cost situation that puts the principal at a
disadvantage. Conversely the agent has an added advantage of the position of power
having access to information and is in the position of making decision on all business
matters. This is where the source of agency problem emerges in the firm, especially
when the employed agent start making decision that favours himself at the expense of
the principal. However, the concern of the principal at the end of day; is the money
invested being spent the way that it is going to actually reward the shareholders? This
what the agency problem is all about.

Besides the above, the other significant issue is the agency cost theory which strikes
the chord for misalignment of interest between the principal and agent. This
misalignment of interest tend to evolve as the principal wants maximum value for his
investment and on the other hand agent is paid a fixed amount irrespective of the effort
he is going to put to maximize shareholders value. In a perfect situation, as per contract
the agent is obligated to act with compassion as he had agreed to receive a fixed
amount to perform according to the principal’s expectations. However in the real world,
often this does not happen as manifested by the accrual of indirect agency cost and
direct agency cost to the principal.

Therefore how to reduce the gap of misalignment between the principal and agent. In
order to ensure that the principal’s goal of maximizing shareholder value is being
realized, the role of stewardship is given to the agent hoping that the agent will

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conscientiously carryout his fiduciary responsibilities. However, this is where the issue
lies; what are the motivational factors that will drive the agent to realize the principal’s
goal in order that the agent act with compassion rather than personal interest. Under
these circumstances, on the one hand, the agent usually will be adequately
remunerated in accordance with market standards, given incentives, added with
rewards for better performance and other perks and privileges in accordance with the
firm’s profit margin standings. Conversely, the principal upon delegating control
function to the agent, has a greater task of determining managerial accountability. In
that, he has to maintain a consistent monitoring and control mechanisms to regulate the
behaviour of the agent.

When does the agency theory becomes a disappointment? When the monitoring and
control mechanism is lax, when the business is on a high growth trajectory, returns are
handsome, adoption of low risk aversion attitude conversely when there is extreme
pressure from the principal for plucking low hanging fruits etc. Ultimately this is when
the ego creeps in to drive the agent with greed and voracity to make fast big bucks at
the expense of the principal. This is where the conflict of interest begins, when the
moral and ethical dimensions of the agent flees through the backdoor. The tragic
journey of the firm begins here, when the discretionary power given to the agent is
abused at the expense of the principal’s interest.

As a result, the agency theory in the governance of firms gave rise to the emergence of
legal innovations and rules and regulations of expected behaviour of both the principal
and the agent and its influence in the eventual establishment of modern corporations as
we see it today. In the discussions that follow, we will be able to ascertain the veracity
of agency theory with regards to its implications on corporate governance in
contemporary global corporations.

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Risk aversion , distributive justice

Stewardship Stakeholder

Corporate Governance

Sharehoder

7
2.0 Corporate Governance

According to Berle and Means (1932) the critical component of corporate governance is
the agency theory which focuses upon separation of ownership and control in a firm.
Klepczarek, (2017) views that, corporate governance is rather a complex, multi-
paradigmatic and highly interdisciplinary subject, therefore it is difficult to point to one
universal definition of corporate governance. Hence it is not surprising that in the
literature numerous theories of corporate governance are propounded. The origins of
corporations might be traced back to Chartered Companies that evolved during Queen
Elizabeth 1’s era at the beginning of 17th century. It is observed that some distinctive
features of those chartered companies had been translated into contemporary corporate
governance features through coercive isomorphism. Hence today’s corporate
governance when referred to from a system’s perspective, (refer figure 3 for system’s
perspective of Corporate Governance model), companies or corporations manifest
similar features of the past to direct and control the various mechanisms and processes
to achieve the pre-determined goals of the organization.

Input Process Outcome

Benefits to Firm

 Operational efficiency
 Improved capital access
Structural Compass of
Elements Direction &  Able to mitigate risk
Control for the  Safeguard against
Execution of Rules
Governance & Regulations, and malpractices
Vehicle Responsibilities  More accountable and
and Rights of
Stakeholders transparent to investors

Processes  Render tools to respond

to stakeholder concerns

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 Figure 3: System’s Perspective of Corporate Governance

According to Singh (2008) corporate governance includes the structures and processes
that act as a compass focusing on the allocation of rights and responsibilities among
key stakeholder groups in the corporation such as board of directors, managers,
shareholders, creditors, auditors, regulators and other stakeholders. It is a framework
that forms a basis for decision making in the corporation’s business performance. He
further reiterated that the principal aim of corporate governance is to align the interest of
different stakeholders in the corporation for the overall benefit of all the stakeholders.

Elsewhere, OECD (2004) an international organization with thirty-five member

countries, defines corporate governance as a “mechanism that involves a set of
relationships between a company’s management, its board, its shareholders and other
stakeholders, also as the structure through which objectives of the company are set,
and the means of attaining those objectives and monitoring performance are
determined.” Similarly, the Basel Committee on banking supervision also has defined its
own code of corresponding corporate governance principles to be practiced across the
global banking industry. (citation)

2.1 Classical and contemporary settings of Corporate Governance

In the study of corporate governance there are fundamental organizational factors such
as historical, cultural, political, legal, leadership as well as institutional those have great
influence in the governance structure of organizations. It is also observed that, the
governance structure has direct correlation with the economic rationale of the
organization which in turn has a direct equation to financial performance. In addition
such factors are also instrumental in the conception of the legal theories (Ho 2012) of
classical and contemporary corporate governance as illustrated in figure 3.

2.2 Legal Theories influencing the development of Corporate Governance

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Interestingly, the conception of legal theories of corporation had a significant influence
over the methods of corporate governance. It led to the debate on the conflict between
shareholder supremacy and managerial power which directly affected stewardship,
shareholder and stakeholder factors in corporate governance. as disparate
perspectives of governance evolved as the departure was made from classical through
semi-classical to contemporary era. Consequentially three specific theories as
illustrated in figure 4, with independent characteristics evolved influencing the
emergence of corporate governance structures with respective implications on the
various governance models in practice.

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 Concession Theory
Type Characteristics Concept
Special charter granted by state for incorporation
as a legal entity only
Classical Free transferability of ownership rights and limited
liability
(17th State Primacy
Does not represent widespread business model
century) Potential for gaining prominence in the
contemporary era due to globalization effect

Effect of Globalization
Aggregate Theory
Type Characteristics Concept
 Corporations are natural entities which do not
have independent existence.
Semi-  Shareholders concentrated and more private
Classical under contractual obligations. Managers are
Shareholder
accountable to shareholders.
(18th-19th Primacy
 Incorporation of a limited liability partnership
century)  State control over shareholders eroded

Realist Theory
Type Characteristics Concept
Shareholders highly dispersed and fragmented

Identification of the corporation with its members

increasingly untenable
Modern Corporations are completely independent of its Managerial
(20th members and having their own interests Primacy
Highly institutional and supports managerial
century power especially in a global setting
Corporation being a real person has its own
onwards)
interests which can differ from shareholders

Source: Own Construct

Figure 4: Conception and Evolution of Legal Theories

2.3 Corporate Governance current debate issues
It is interesting to examine current debates on corporate governance marked by razzle-
dazzle. It is a fact that no one type of corporate governance model is universally
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acceptable as each model has its own merits and demerits. According to Kseniya and
Denis, ( citation ) there is no definite answer which of these models is the most efficient
one, because corporate governance models differ in philosophy and application across
geographical regions as depicted in table 1., for each one develop in a specific
economic-legal environment of a certain country from which they could not be
separated from.

CG Board Structure & Key Critical Theory Bias Roles

Model Players Function

Unitary Board Decision Control Stewardship theory; Strategic

Anglo-US & Decision Shareholder bias
Model (Board of Directors, Management
Management,
Shareholders)

Two-Tiered Board
Decision Control Agency theory; Control
German 1. Supervisory Board Legalistic approach
Model (Representatives
of Shareholders &
Employees Union) Decision
Management Stakeholder theory; Service
Resource
2. Management dependence
Board

Unitary board Decision Control Stewardship and Strategic

Japanese & Decision Stakeholder theory Service
Model (Main bank, Management
Keiretsu – major
shareholder,
Management,
Government)

Source: Adapted from Maassen, (2002); Bottenberg, (2016); Morgan & Takashi, (2012)

Table 1: Corporate Governance Models

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2.3.1 Characteristics of Corporate Governance Models

Incidentally, the evolution of various governance models can be traced back to the
conception of legal theories in the past. Invariably, the characteristics of concession,
aggregate and realist theories enabled the conception of various governance models
discussed in table 1. Governance models, though there is historical significance to their
evolution, ubiquitously the elements of structure and legal perspectives continue to
evolve with changing times to make the models essentially relevant to a particular
period in time.
“If the unity of the corporate body is real, then there is reality and not simply legal fiction in
the proposition that the managers of the unit are fiduciaries for it and not merely for its
individual members, that they are . . . trustees for an institution [with multiple constituents]
rather than attorneys for the stockholders”.
E. Merrick Dodd, Jr.
Harvard Law Review, 1932
However, in principle the structure of each model embodies the following constituent
elements: the key players in the corporate environment, the share ownership pattern,
the composition of board of directors; the regulatory framework; disclosure
requirements; corporate actions. In all these, as quoted above the role of managers
(board of directors) as trustees remains critical till today.

Critical issues of Debate in Corporate Governance

Stewardship
In contrast to agency theory discussed above, the stewardship theory characterizes a
different perspective of the managers as good stewards who will act in the best interest
of owners. It sees the managers as being committed to the business and returning good
dividend to the shareholders and giving them the security of investment and acting in an
honourable and honest way. In fact stewardship theory is a perspective of management
which sees the management as committed to the business, business objectives and in
dealing with the shareholders in a good manner. A manner in which is consistent with
the shareholders expectations when they first invested in the business. Therefore the
steward’s behaviour in the organization is expected to be pro-organizational, collectivist,
and not working for his individual self and try to build an empire for himself.

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Under such circumstances, shareholder wealth is maximized, the steward’s utilities are
maximized too, because organizational success will serve most requirements and the
stewards will have a clear mission to look after interest of the business in total and also
the business interests of the owners. This is where they see themselves as functionalist
and performers trying to fulfill the social purpose of the corporation.

Therefore they play a significant role of balancing the interest of various groups within
and external to the organization. They come in between these interest groups or
stakeholders to resolve the conflict of interest among these groups in order to promote
the business itself and the business interest of the owners. Thus it is evident that
stewardship theory sees a strong relationship between managers and the success of
the firm in terms of economic performance. Having said that, it is also worth noting that
the managers as stewards are engaged in self-promoting themselves by promoting the
longevity of the business and the capacity of the business to survive, grow and prosper.
Hence they are looking after their own jobs and positions as well. So by acting in this
decent way looking into promoting the business, resolving issues and balancing group
interests, trying to promote innovation, change and, growth and development
conversely varies with the characteristic of agency theory.

Therefore the focus of stewardship theory is on structures that facilitate and empower
rather than monitor and control the stakeholders. As opposed to monitoring and control,
stewardship theory empowers the various contributors and work with them and getting
them identified with the organization to look into the interest of the organization because
it is in their interest as well as the interest of the owners. Therefore stewardship theory
takes a more liberal view of the separation of the role of chairman and CEO, and
supports appointment of a single person for the position of chairman and CEO as the
element of trust prevails among the shareholders and stakeholders in the organization.
In summary stewardship theory sees the organization as more harmonious whole, the
management working in the interest of the shareholders and stakeholders and indeed

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working in their own interest too. There is no cause for alarm that the management will
work against the interest of the owners as regarded in the agency theory.
Next, the theory in contention is the shareholder theory which espouses that the
company’s position should always act in the best interest of the shareholder alone
insisting that a manager’s sole obligation is to maximize profits for the shareholders.
The argument is, the shareholders are the owners of the company as such they have an
interest in profit and it is in this interest that we have an obligation to pursue. On the
other hand it is also claimed that shareholder theory is the most efficient approach and
so it maximizes economic benefits for everyone. If every firm aims for its own profit,
than in the long run everyone who is employed by the company and is affected by the
company will benefit from this approach.

Interestingly, the stakeholder’s theory views the firm’s business objective from a
different perspective. It is argued that the company should run not only for the benefit
of the shareholders but also create value for the benefit of all stakeholders. A
stakeholder group is any identifiable individual or group who can potentially affect the
business objectives and performance of the organization or who is affected by the
performance of the organization. (Velasquez, p. 24). Generally, stakeholders of firm
include shareholders, management, employees, and employees’ families, local
communities, governments, consumers, taxpayers, financiers, creditors and suppliers. If
the firm fails to take into consideration of the role of these stakeholders in the conduct of
its business, then it is bound in one way or another to see a decline in its business
performance. (R. Edward Freeman- university of Virginia, 2009). He further reiterated
that focus on all stakeholders together will make capitalism tick as opposed to focusing
on a single stakeholder for all the stakeholders together can create something that no
one of them can create alone.

On the whole, the stakeholder theory treats all people and organizations involved as
ends. Thus it fully recognizes the humanity of each person across the firm’s entire
supply chain. It encourages and promotes each party along the supply chain getting its
fair share of the profits of the company. Studies show that companies that embrace a

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strong stakeholder theory are more successful. The novelty of this theory is, it views a
business as a fully human enterprise.

Case study of merck and river blindness

How does merck’s decision impacted the economic performance of the firm
Who are the stakeholders impacted by merck’s decision
How should we go about balancing the moral claims of various stakeholders

Across the globe, inter-alia, there are three key types of governance models in practice
as reflected above; they are Anglo-US model, German model and the Japanese model.
From a historical perspective, the commonly debated items that are still ongoing across
these three models are the misalignment of goals between the shareholders and
management, the institutional structure and the compliance to regulatory requirements.
(citation). Irrespective of governance model, every country that practices corporate
governance has its own set of governance principles, rules and guidelines as reflected
in appendices 1, 2, 3, & 4).

Anglo-American model
This model is based on capitalist or free market economy that assumes the separation
of ownership and control in most publicly held corporations It is used as basis of
corporate governance in U.S.A, U.K, Canada, Australia, New Zealand and some
commonwealth countries. This model is characterized by dispersed share ownership of
individual and increasingly institutional investors participation. It has a well-developed
legal framework defining the rights and responsibilities of key players involving

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management, directors and shareholders. Characteristically, this model gives emphasis
to hierarchical separation between planning and implemental operations employing
unitary board structure. As for US, the regulatory framework underscores the US
Pension Fund Regulation Laws, and this has a huge impact on the shareholders’
behaviours which gives them the traction to get involved in all aspects of corporate
governance. (citation). For example, under this model there are routine and non-routine
corporate actions that require shareholders’ approval. More importantly, the regulatory
requirement for corporate financial data disclosure is carried out on a quarterly basis.
On the whole, this model postulates a well regulated system, however U.S. and U.K.
have some variations in their respective regulatory framework to satisfy the local
environment.

2.3.3. German model

This model is very much based on social market economy with banks as key players. It
is often cited as a classical case of “non-shareholder value orientation” and therefore it
is considered to be biased towards stakeholder orientation. Characteristically, this
model gives emphasis to hierarchical separation between planning and implemental
operations, employing a board of managers and a board of supervisors. (citation). This two-
tiered board structure of management and supervisory board and its composition size is
set by law, underscoring German Industrial Democracy Act and Employee Co-
determination Law. Co-determination (by management and workers) is a guiding
principle of the German corporate governance since 1951. (Economist, 2005). At the
onset of 2000, for the wellbeing of corporations, a well-structured regulatory framework
had been introduced to strictly regulate the behaviours of all board members. Directors
themselves are accountable to their shareholders, as well as to the appropriate corporate
governance standard. (citation). Unlike the Anglo-American model, irrespective of ownership
position, the shareholder is legally limited by voting right restrictions. However, there are
number of routine corporate actions that need shareholder approval. Lastly, the
corporate financial data disclosure is done on a semi-annual basis. (Dagala, 2015).

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2.3.2 Japanese model

Similar to the German model the Japanese model is based on a broader view of
corporate governance that is stakeholder biased as opposed to Anglo-US model. In this
model, there are four key players namely; the main bank a major shareholder, affiliated
company or keiretsu (a conglomeration of businesses linked together by cross-
shareholdings to form a robust corporate structure) a major inside shareholder, the
board of directors include internal executives, managers, heads of departments (the
average Japanese board contains 50 members) and the government. Interaction among
these players serves to link relationship rather than balance power as in the case of
Anglo-US model. The Japanese model regulatory framework underscores Japan’s
Industrial development policies. Lastly, the corporate financial data disclosure is done
on a semi-annual basis.

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3.0 Global Corporate Scandals

History is replete with corporate financial scandals almost with every nation state in the
world. Those scandals reflected in figure 1 above, are not exhaustive, as there are
many more in the annals of history. The fact that corporate scandals throughout history
has been allowed to get to such an extreme level is evidence of much larger problems
either oversight irresponsibility, inherent corruption within organizations, feigning
ignorance to laws or a global culture that allows flexible moral standard or perhaps all of
them at once. (citation). Poor governance culminating into a scandal may potentially put
an organization at risk of commercial failure with financial and legal problems allowing
itself to lose sight of its purpose and responsibilities to stakeholders. Ultimately these
scandals, have devastating effects on communities and wide ranging consequences,
tremendous damage to public confidence in the commercial and financial world.

That said, the global concern is, beyond the moral and ethical impact of these scandals
upon the societies, the real concern is the economic sustainability and continued
survival. The “trusted perpetrators” invariably ignore the utilitarianism principle when
they are induced by propensity to commit irregularities leading to scandals. As a result
the degree of impacts on organizations and the society as whole manifest in various
forms and shapes bringing down corporations to their knees. In the ensuing discussion,
the implications of specific governance models on three identified failed organizations
will be examined to determine the governance models veracity.

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3.1 Case No.1 – The Downfall of Lehman Brothers, United States

Facts of the Case

Lehman Brothers was the fourth largest U.S investment bank. On September 15, 2008
filed for bankruptcy. Lehman’s bankruptcy filing was the largest in history with $639
billion in assets and $619 billion in liability. (citation) Its assets surpassed those of
previous bankrupt giants such as WorldCom and Enron. Bankruptcy was declared due
to fraudulent accounting and external audit collusion that led to inflated asset values
which finally brought the bank to its knees.

Causes of Downfall

Lehman Brothers involvement into the subprime mortgage market in a headlong rush
manner proved to be a disastrous step. (citation) Subprime mortgage refers to type of
loan granted to people with low credibility. In 2003 and 2004, with U.S. housing boom
well underway it acquired mortgage lenders to support loan processing services. Inter-
alia a particular loan known as ‘Alt-A’ loans were overwhelmingly subscribed to
potential house buyers. Alt-A is a classification of mortgages with a risk profile falling
between prime and subprime.

These loans are usually issued to top quality rated borrowers with good credit
histories. However, they usually have some high risks due to provision factors
customized by the lender and historically these loans have been known for high levels
of default due to lower quality of loan documentation. Lehman Brothers facilitated
these loans without significant documentation of income and employment from the
borrower of lower credibility. As result many of these borrowers defaulted on their
mortgage loans which led to the subprime crisis and mortgage fallout in 2008.
Investopedia Staff (2017). Besides, Lehman Brothers engaged themselves with a
devious massive borrowing scheme known as REPO 105 transactions, where loans
were disclosed as sales. Ultimately, bankruptcy was declared as there was no political
palatability for bailouts neither from the government nor other institutions. As matter of
fact, its downfall consequences did not directly affect average Americans, but the
brunt of the impact was borne by institutional investors and investment bankers.

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The Impact of Organizational Factors on Corporate Governance Theories

Historically, Lehman Brothers since 1850 had survived five U.S. economic disasters.
That gave them the false confidence and the feeling of prescience that they are “too big
to fail”. Next politically the power and influence of board remained concentrated though
there was shareholder primacy but dispersed. The management executives (agents)
leveraged on the traction of the Agency theory to create adequate space to manoeuvre
and scheme unethical practices. They had miserably neglected fiduciary duties leading
to financial scandals affecting shareholders and stakeholders.

From a legal perspective the executives were non-compliant to legal codes of power
and authority. They abused company rules and regulations leading to fraudulent acts
and misrepresentation of financial information namely book cooking by colluding with
external auditors. Culturally the stewards were great risk takers who displayed low risk
aversion for highly capital intensive projects. The firm’s loan facilitating practices were
not sound and rationale. In short, risk management practices in the firm were profoundly
inadequate resulting in low responses to market changes. Eventually this led to massive
loan defaults culminating into a disastrous financial crisis. The ultimate impact was the
firm’s credit rating got downgraded.

Institutionally, the board structure overbearingly skewed towards management

discretionary powers and control. This led to the executives’ unethical decision making
in critical businesses which eventually led to great blow to shareholder and stakeholder
values. In terms of leadership there were less proactive management measures, unable
to timely asses the would be impacts of emerging crisis situations. Ultimately lost
leadership credibility as well as political and industry support for bail out and eventually
leading to the declaration of bankruptcy.

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3.2 Case No.2 – The Downfall of Siemens, Republic of Germany

Facts of the case

Siemens an electronics giant in Germany, had business dealings with global entities
involving 160 countries. Its modus operandi to secure business contracts was to offer
bribe and make fake agreements. In 2006 a series of scandals both internal and
external, involving bribery and corruption, embezzlement of company funds and tax
evasions rocked Siemens. An American law firm that investigated Siemens claims
that its employees paid $2.3 billion in bribes to get contracts in the developing
countries (Boehm & Murphy, 20007).

Causes of Downfall

According Uwe Dolata, from the German association of federal criminal investigators,
“Siemens had institutionalized corruption and bribery was Siemens’s business model”.
He further cited that it had an extremely embedded company-wide culture of unethical
and business malpractices especially in the global business environment. The
leadership and the supervisory board was in cahoots with the company-wide systemic
bribery practices across 160 countries it was doing business. Prior to 1999 bribery
was an accepted practice in Germany. At the onset of 2000, international pressure on
corporate governance practices was initiated by OECD member countries.

As a result, German domestic regulators responded by introducing updated

governance and control measures for their global corporations including Siemens to
comply to the new requirements. However, a deeply entrenched culture over decades
was not easy to shirk off. The leadership in Siemens devised devious schemes to
cover the systemic bribery practices. There was clear lack of effective internal control
over such unethical practices and weak internal control over financial reporting.
However, the leadership miserably failed to respond effectively to the new regulatory
initiative as it would seriously jeopardize the company’s new business initiatives and
thousands of jobs.

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As an outcome of total disregard to ethical business practices number of lawsuits
amounting to $4.15 billion against Siemens were initiated by affected parties both
domestic and international. As a result Siemens reputation suffered badly and lost its
market competitiveness followed by serious financial implications to company bottom
line and ultimately affecting shareholders value and stakeholders interest.

Organizational Factors Influencing Siemen’s Downfall

Historically, Siemens was carrying out an unethical practice for continued survival in the
business world. It had decentralized global business structure to facilitate its global
businesses. Eventually the arms of law caught up leading to global humiliation and
massive fine. Subsequently, centralized business control structure was initiated to
manage its business. Within the firm, political power and influence of boards though
distributed between supervisory and management board, element of collusion prevailed
among them at the expense of stakeholder primacy. The executives blatantly
disregarded the corporate governance codes and laws. A devious scheme in
organizational practice led to ‘legitimize’ illegal and unethical practices as a norm in the
organization subsequent to the intervention measures by the government. Legal
aspects in the conduct of business were given little attention with a view to secure more
businesses unethically. Both management and employees disregard to compliance to
legal codes of governance were the order of the day. Unethical practices leading to
market inefficiency resulted in stakeholders’ displeasure and reaction wanting reforms in
the firm’s governance.

Before 1999 Siemens practiced systemic bribery that was deeply ingrained as the firm’s
culture. This practice was continued even there were changes in German law after
2000. It led to strong reaction from OECD member countries which led to lawsuits
costing millions. Eventually Siemens lost its global reputation leading to serious
business decline. In the wake of global humiliation approaches to new ethical business
practices were introduced and heightened scrutiny on company’s culture came into
practice.

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For a long time, institutionally bribery and corruption had been the standard operating
procedures (institutionalized) in the company. Essentially it was a ‘legally’ accepted
practice before 2000. New ethical and compliance measures were introduced but to no
avail. Internal resistance was so high and made compliance difficult; hence the
leadership had an arduous task of transforming the firm’s culture. In terms of
leadership, philosophically and culturally the entrepreneurial leadership was misled and
misguided with unethical practices. Total disregard to the rule of law and social purpose
of the organization led to the chagrin of stakeholders. To a large extent leadership
ineffectiveness affected company’s long term business interest, shareholder and
stakeholder values. The ultimate intervention was the changed leadership at the
supervisory board and greater accountability sought at most senior levels in the
organization.

3.3 Case No.3 – The Downfall of Toshiba, Japan

Facts of the Case

Toshiba is one of Japan’s oldest (established in 1939) and the most established
corporation reputed as a nuclear titan. It is a household name not only in Japan but
around the world. In 2015, it got itself mired into an accounting scandal that led the
share market plunge wiping out about $6.3 billion in market value. (Inagaki, Lewis &
Crooks, 2017) Subsequently a whistleblower revealed that the company had
overstated operating profits by $1.2 billion over the years. The scandal involved the
top executives accused of systematically lying about the profits of the company
successively for seven years. It was disclosed by a government prosecutor who
investigated the irregularities in the company’s earning statement.

Causes of Downfall

The government investigation report revealed that in 2009, the company leadership
was informed by its employee that the company is going to incur an operating profit
loss of about $203 million over a period of six months; the leadership demanded an
improvement in profit of $113 million, lest the business unit will see its closure. The

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subordinates were warned of the serious implications should they fail to achieve the
prescribed target, a failure will cause the close down and losing jobs. Further to the
above, there was a very unproductive culture that existed between the managers and
the leadership. Managers who were accustomed to beating out competition were
afraid to herald any bad news to the leadership. Leadership in Toshiba insists not to
hear any negative feedbacks at all times from its managers. As a result, this culture
stifled Toshiba’s innovative frontier at a time when it badly needed to and sadly
remained status quo. According to professor Ulrike Schaede at University of
California, San Diego, described Toshiba and its ilk as ” the managers are a bunch of
yes men that do things according to the wishes of the boss, rather than what they
think is good or the right thing to do for the company.” As a result, everyone moves in
a lockstep in the direction of the bosses instead of exploring innovative ideas.

Another major factor that brought the downfall of Toshiba was the poorly timed
acquisition of Westinghouse, US based builder of nuclear power facilities for $5.4
billion. The intriguing factor is, Toshiba had no expertise in the area, but the inducing
factor at that time, the industry seemed poised to boom. Therefore the leadership
made a questionable surmise in such an epic purchase. As a matter of fact, it took
Toshiba 70 years to reach its zenith and just a decade to fall into an abyss.

Organizational Factors Influencing Toshiba’s Downfall

Historical, Toshiba maintained high ethical standards for all its employees throughout
the company. However these standards were compromised due to changes in global
market environment affecting company profit margin. As a result corporate leadership
pressured the business unit managers to meet profit targets which ultimately led to
fraudulent accounting practices. Besides, politically the leadership had high
concentration of power and dictating influence. Subordinates were not given a chance
to be heard even though consensual approach is espoused as Japanese culture.
Subordinates refrain from effective communication with leaders. Therefore accurate
information flow in the organization was stifled and as a result leaders made flawed
decisions affecting shareholder and stakeholder values.

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From the legal perspective, corporate governance lacked much legal traction. This was
due to low level of government regulatory compliance to auditing and disclosure
practices. Low regulatory compliance enabled the leadership greater freedom to
manouvere management efforts as they wish and accountability was misguided.
Culturally, moral values of leadership took a dip affecting corporate culture. The
individuals involved compromised their integrity, empathy and respect for subordinates
and stakeholder interests. Shift in corporate culture and pressure to hoodwink
shareholders with misleading disclosure of financial figures led to the scandal. As a
result share prices dropped in billions and the investors were left in the lurch.

Institutionally the firm espoused flat structure to promote consensual approach in

decision making. However the order of the day was highly bureaucratic with misled
ethical framework. The implied structure failed, exerting undue pressure leading to
misreporting of financial data and book cooking. Consequently the reputation of the
company was badly tainted. Irresponsible leadership demonstrated unethical
behaviours leading to poor governance and not being able to effect good internal
management and controls. The leadership was not able to effectively respond to
market conditions. Poor decision making in acquisition of new business also resulted in
the company’s downfall. As a result twelve top leadership and senior board members
resigned with ignominy.

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4.0 Researcher’s Observations

With respect to corporate governance, Sir Adrian Cadbury quoted “Companies … must
be free to drive their companies forward, but exercise that freedom within a framework of
effective accountability. This is the essence of any system of good corporate
governance.” In essence good corporate governance is supposed to create a strong
future for an organization by consistently driving towards a vision and ensuring that day-
to-day management is congruent with the organization’s goals. (citation) At its core,
good governance is all about accountable leadership and stewardship, practicing high
ethical standards that will focus on the interests and wellbeing of the organization per
se, the stakeholders and the society as a whole.

However the observations in the above study of various governance models practiced
by US, Germany and Japan show the lack of morality among the decision makers in the
corporations. Dismal performance of ethics, trusteeship, control, accountability and
transparency in the organizations resulted in epical disasters to corporations. To a large
extent, the analysis of the influence of organizational factors in the cases referred
reflects disregards to inspirational and exemplary leadership practices, relying heavily
on historical trends, misrepresentation of financial disclosures, culture of departing away
from social purpose and disregards to the respective codes of governance and laws.
Hence transparency and accountability of corporate captains remains a highly desired
component of corporate governance. Therefore this raises a deep concern over the
professional integrity and commitment of those corporate leaders resulting crisis in
confidence.

The above are the significant trends observed in all scandals examined. Therefore the
veracity of governance models irrespective of their idiosyncrasies is believed to be a
subject of debate for ages to come. The significant implication of agency theory is the
fundamental factor in the governance of all the corporations discussed above. The
question now is the decadence of moral and ethical standards among all the decision
makers assuming the role of agents. Along the lineage of offices, it is noticed, though
the agents were kept motivated, adequately compensated and well taken care;

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somehow or rather at some point in time, they tend to cross-over self-created blurred
boundary between ethical and unethical dimensions of decision making.

Thus, to date, no particular governance model has proven foolproof because all the
stewards from those affected organizations failed to exercise, that freedom within a
framework of effective accountability as stated by Sir Adrian Cadbury. In analyzing the causes
of corporate misdeeds, it is apparent that there is something critically amiss in the way
corporate governance is orchestrated.

According to Salleh and Ahmad (2015), for as long as governance is treated alone as a
process of decision making, rather than a moral compass guiding the internal behaviour
of human in decision making than the chances of crystalizing a lasting solution for
corporate misdeeds may remain remote. They infer that a process-based governance
structure underscoring legal compliance dominated by material reward or deprivation
cannot but promote a compliance-to-rule mindset contrary to morally bound mindset.
Therefore, Salleh2 and Ahmad suggest that non-material needs to be included to
provide for wholeness of the corporate governance discipline in which ethics and
integrity are of primacy. They also argued that in order to effectuate sustained ethical
behaviour among corporate captains, it is the motivation for such behaviour that needs
to be addressed for human behaviour is only the shadow of their essence.

Essentially the contention of the argument is to enable human beings to overcome

blind-spots and to shift away from Cartesian/Newtonian view (inductive reasoning) to
Einsteinian Quantum view (deductive reasoning) to make decision and solve problems
in a holistic manner. Effectively the shift can only be effectuated with the inheritance of
human governance characteristics (refer appendix 5) among the corporate stalwarts.
Upon which pivots the human-centric and value-based frame of governance termed as
human governance which can make meaning and create value and sustainability for the
champions of corporate governance. Illustrated below (table 5) is the descriptive
characteristic of corporate governance versus human governance. Each descriptive
should be seen as forming a continuum between on one end meeting the legal
requirement and the other as a human person of sentient origin.

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No. Corporate Governance Descriptive Human Governance Descriptive
(For the Legal/Artificial Person) (For the Sentient/Spiritual Being)
1. Discovery Disclosure
2. Translucent Transparent
3. Conformance Beyond conformance
4. Caveat emptor Edico venditor
5. Dead Emergent
6. Symbol Meaning
7. Label Essence
8. Form Substance
9. Rule-based Principle & Value-based
10. Legal enactments Innate nature
11. Rules & compliance Good conduct & Beyond compliance
12. Newtonian classical Quantum Science
13. Fragmented Wholeness
14. Outer-in Inner-out
15. Letter of law Spirit of law
Source: Salleh & Ahmad (2015)

Table 5: Descriptive of Corporate governance vs Human Governance

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5.0 Conclusion

In the foregoing discussion, it is apparent that inherent organizational factors, structures

and processes had their respective influences on various governance models in
effecting direction and control of the corporate organizations. Besides, the governance
models representing three different countries from the east to west portends that
irrespective of race, religion and culture human beings are bound to be deviant in their
behaviours especially when endowed with power and influence, and obsessed by
greed. Hence, the past global corporate scandals seem to be a symptom of our age.
They may continue as part of our collective culture for generations to come as long as
capitalism continues to dictate the global economic pattern. Needless to say, that the
agency theory being a characteristic component of capitalism will continue to thrive and
keep the agency theory problems unending. The fact that corporations have been
vulnerable to corporate malfeasance, strikes deep into the moral fabric of corporate
custodians. Though corporations are lesser in number compared to other economic
institutions, but their economic output commands more than 80% of the national GDP.
Therefore every wrongdoing of these corporate custodians has a disastrous impact on a
larger portion of the whole society.

Change is constant ….therefore it is time to question the traditional views of corporate

governance. Hence, the researcher suggests that the global corporate leaders look into
the prospects of accepting the culture of human governance as the core guiding
principle for professional conduct which could be realized by augmenting human
governance as an integral component of the existing corporate culture. The
researcher’s assumption is that the above approach augments and helps to develop a
more inclusive and holistic approach in the overall governance process of corporations
as opposed to individualistic, egoistic and materialistic approach by corporate captains,
leading to unethical decision making in corporate governance. As quoted at the
beginning of this paper the reappearance of a crime is more likely than its initial
emergence, unless the corporate world questions the traditional view of corporate
governance and make initiatives to depart from it to explore the frontiers of human

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governance. Otherwise history will continuously repeat giving substance to Sir Adrian
Cadbury’s argument.

(3200 words)

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