Common Governance Problems
Looking at Enron, WorldCom, and Satyam, we see the same movie playing over and over again.
The Pattern of Failure
Autocracy
Complacency
Collusion
Greed
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.
Test Your Knowledge
Question 1 of 5
1. A common feature in corporate failures is: