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Corporate Governance Failures – Introduction

History is littered with corporate titans that collapsed overnight due to governance failures. From Enron to Satyam, the pattern is often the same.

The Fraud Triangle

Why do people commit fraud? Donald Cressey proposed the Fraud Triangle. All three elements must be present:

  1. Pressure: "I need money" (Personal debt) or "We must meet Wall Street targets" (Corporate pressure).
  2. Opportunity: "The internal controls are weak. No one will catch me."
  3. Rationalization: "I am just borrowing it. I will pay it back. The company owes me this."

Common Themes in Failures

  1. Dominant CEO: A "Superstar" CEO who controls the Board and fires anyone who asks questions.
  2. Weak Board: Directors are friends of the CEO (Cronyism).
  3. Complex Structure: Thousands of subsidiaries (Shell Companies) used to hide debt.
  4. Auditor Failure: Auditors getting paid huge consulting fees, so they ignore the accounting fraud.
Note

Hubris: The ancient Greek word for "Excessive Pride". Most scams start with Hubris. The CEO believes they are invincible and above the law.

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