Scandals, Crises, Reactive nature of CG Reform

Question 1

What is the significance of CG scandals?

Answer 1

Scandals highlight significant failures in corporate governance mechanisms, often leading to financial losses and reputational damage.

Question 2

Key CG Scandal Examples?

Answer 2

• Carillion (UK): Inadequate oversight from auditors and the board, raising questions about the effectiveness of existing governance structures.
• Role of the Big Four in auditing failures, dominating the market with potential conflicts of interest in audit quality and independence.

Question 3

Key CG Reforms?

Answer 3

• Evolution of the UK CG Code
• Cadbury Report (1992)
• Sarbanes-Oxley Act (2002)

Question 4

Key features of the Evolution of the UK CG Code?

Answer 4

• Regular updates to address emerging challenges
• Revisions reflecting the dynamic nature of CG needs
• ‘98, ‘03, ‘06, ‘08, ‘10,…

Question 5

Cadbury Report Key features?

Answer 5

• 1992
• Introduced after major scandals in UK
• Emphasized a code of best practices and the ‘comply or explain’ principle

Question 6

Sarbanes-Oxley Act Key features?

Answer 6

• US 2002
• Enacted in response to major scandals e.g. Enron
• Emphasized strict compliance measures, transparency, and personal accountability of executives

Question 7

Inherent Challenges to CG Reforms?

Answer 7

• Reactive Nature: Often, reforms are reactionary, rather than preventing them.
• Effectiveness: Persistent skepticism about the ability of reforms to fundamentally change corporate behaviours, especially regarding transparency and accountability.

Question 8

Criticisms of CG Reforms?

Answer 8

• Reforms often result in ‘box-ticking’ excersises rather than substantive changes.
• Ongoing dominance of shareholder value focus may undermine broader stakeholder interests, including employees and the community.

Question 9

What external factors have influenced CG Reform?

Answer 9

• Legal/ regulatory
• Market/ Economic conditions
• Cultural shifts

Question 10

Example of the legal/ regulatory environment impacting CG Reform:

Answer 10

Introduction of stricter regulations by ARGA in the UK to replace the FRC aims to enhance accountability and audit quality.

Question 11

How can market/ economic conditions impact CG Reform?

Answer 11

Economic crises and market failures often precipitate governance reforms to restore investor confidence and stabilize the financial markets.

Question 12

How can cultural shifts impact CG Reform?

Answer 12

Growing awareness of ESG factors is pushing reforms towards more sustainable and ethically sound business practices.

Question 13

What are the limits of the ‘comply or explain’ principle in CG?

Answer 13

While it allows flexibility, it can lead minimal compliance or superficial explanations without real adherence to governance principles, sometimes failing to ensure accountability and genuine governance improvements.