Common Governance Problems
Looking at Enron, WorldCom, and Satyam, we see the same movie playing over and over again.
The Pattern of Failure
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1. The "Rockstar" CEO
- Markets love a charismatic visionary.
- Danger: When the visionary starts believing they are above the rules, governance fails. (e.g., Elon Musk tweeting about taking Tesla private).
2. Ineffective Non-Executive Directors (NEDs)
- Problem: NEDs often don't understand the business (Enron's board didn't understand derivatives).
- Time: They meet 4 times a year. How can they supervise a global giant in 20 hours?
3. Shareholder Apathy
- Institutional Investors (Mutual Funds) often just vote "Yes" to everything the management proposes because they don't want to rock the boat.
4. Compensation Structure
- Paying CEOs purely in Stock Options encourages short-term stock pumping (even via fraud) so they can cash out.
Note
The Solution:
- Whistleblower Hotlines: Empowering the employee.
- Clawback Provisions: If fraud is found later, the CEO must return his past bonuses.
- Auditor Rotation: Changing auditors every 5 years so they don't get too cozy.
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