In the past, corporate boards had a lot more power over the shareholders because of state corporation laws; however, concerns of shareholders over the concerns of administration has led to many corporate governance reforms. Corporate governance can be defined as the ways a firm protects the interest of its finances such as investors, leaders, and creditors Corporate governance is a general term for all of the rules and policies a board of directors follows to ensure accountability and fairness between the firm and its stakeholders. These procedures are able to create a sense of fairness because they act as a system of checks and balances to solve conflicting interests of stakeholders in accord with their duties. Many reforms have taken place because of recent accounting scandals that have caused investors to have less confidence.
Scandals that occurred in Enron, HealthSouth, Tyco, and Worldcom has caused these companies equity values to decrease dramatically and has caused their bonds to fall to junk bond status because investors lost trust in the companies Many of these companies even had to file for bankruptcy. The market has been down because investors no longer have confidence in companies as much as they used to because of all the recent scandals. Exposure of these scandals has led many people to believe that there are serious corporate governance issues. As accounting problems are usually discovered through a restatement of financial reports it seems as these governance provisions are not effective and are in fact failing. Financial difficulties have been blamed on corporate governance issues that deal with the board of director’s independence and the way they are elected.
One of the main problems of America today is that people are self interested and make decisions that benefit themselves rather than make decisions that benefit the community as a whole. Businesses face problems when the owners of the company are also on the board of directors because they make financial decisions to benefit themselves. The board of directors is a group of people who are supposed to regulate the company and act as a system of checks and balances; however, when the owners are also on the board of directors than they are given unlimited power, creating a system of internal weak control. Scandals that have happened in the past would have been detected a lot earlier and even possibly prevented if the managers knew that they were being monitored. Hence, independent directors are believed to be more effective as they provide a different perspective and are able to better monitor the managers. Research has shown that firms with independent boards have less incidences of accounting fraud.
American businesses face problems with having a separation between ownership and control because the owners are voting for themselves. The other major problem that remains within the board of directors is that the shareholders and not the stakeholders elect them. This voting system causes the directors to focus on the interests of shareholders and not on the stakeholders. The truth is that a company’s actions impact not only the people that invest money in them, but everyone around them. IF all people who were affected by a business elected the directors than there would be less externalities. Companies would be held more responsible for their actions and would be held more responsible for their actions and would no longer be able to make choices at the expense of hurting the environment.
As the American market has been facing many accounting problems some changes have already been made to try and improve corporate governance. In 2002, the United States enacted the Sarbanes-Oxley Act, which created new standards and rules for public companies to follow. The act created the Public Company Accounting Oversight Board to regulate auditors. Companies re noq required to follow new auditor requirements and take responsibility for accuracy of their financial reports. The public is to be notified of conflicts going on within the company under this law. In addition, the Sarbanes- Oxley Act created penalties for committing fraud to deter it from occurring. Overall, the Sarbanes- Oxley Act was created to gain investors confidence after a number of major accounting scandals.
Additional changes can be made to improve the American market and increase investor’s confidence more. Audit committees and corporate boards should be required to meet more frequently than just a few times a year. This change would allow for directors to detect any accounting problems early before it becomes an even bigger problem. The board of directors, which meet about eight times a year, should meet more often because of it’s large agenda. Directors have many other responsibilities besides just overseeing financial reporting such as hiring and firing, reviewing strategies, and so on. Even if the board is being effective it may have a difficult time detecting fraud because the board is busy with it’s other responsibilities. Requiring the audit committee and board to have more meetings a year would allow them to focus on overseeing financial reports more. In a time of economic difficulty it will be interesting to see what changes wil be made to improve the market’s stability.