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Corporate Governance

Corporate governance

Corporate governance is the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many players involved (the stakeholders) and the goals for which the corporation is governed. The principal players are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large. Corporate governance is a multi-faceted subject. An important part of corporate governance deals with accountability, fiduciary duty and mechanisms of auditing and control. In this sense, corporate governance players should comply with codes to the overall good of all constituents. Another important focus is economic efficiency, both within the corporation (such as the best practice guidelines) as well as externally (national institutional frameworks). In this "economic view", the corporate governance system should be designed in such a way as to optimize results. Some argue that the firm should act not only in the interest of shareholders, but also of all the other stakeholders. Recently there has been considerable interest in the corporate governance practices of modern corporations, particularly since the high-profile collapses of firms such as Enron Corporation.

Definition

The term corporate governance has come to mean many things. It may describe:
- the processes by which companies are directed and controlled
- encouragement of companies' compliance with codes (as in corporate governance guidelines)
- investment technique based on active ownership (as in corporate governance funds)
- a field in economics, which studies the many issues arising from the separation of ownership and control At its broadest, corporate governance encompasses the framework of rules, relationships, systems and processes within and by which fiduciary authority is exercised and controlled in corporations. Relevant rules include applicable laws of the land as well as internal rules of a corporation. Relationships include those between all related parties, the most important of which are the owners, managers, directors of the board (when such entity exists), regulatory authorities and to a lesser extent employees and the community at large. Systems and processes deal with matters such as delegation of authority, performance measures, assurance mechanisms, reporting requirements and accountabilities. In this way, the corporate governance structure spells out the rules and procedures for making decisions on corporate affairs. It also provides the structure through which the company objectives are set, as well as the means of attaining and monitoring the performance of those objectives. Issues of fiduciary duty and accountability are often discussed within the framework of corporate governance. Whilst the term has a descriptive content, it is commonly used in an aspirational sense, by way of holding out a model which practice should seek to emulate. Reference can be made in this regard to various statements of corporate governance principles or guidelines, both hortatory and prescriptive. As a result of the separation of stakeholder influence from control in modern organisations, a system of corporate governance controls is implemented on behalf of stakeholders to reduce agency costs and information asymmetry. Corporate governance is used to monitor whether outcomes are in accordance with plans; and to motivate the organisation to be more fully informed in order to maintain or alter organisational activity. Primarily though, corporate governance is the mechanism by which individuals are motivated to align their actual behaviours with the overall corporate good (ie maximum aggregate value generated by the organisation and shared fairly amongst all participants).

History

In the 19th century, state corporation law enhanced the rights of corporate boards to govern without unanimous consent of shareholders in exchange for statutory benefits like appraisal rights, in order to make corporate governance more efficient. Since that time, and because most large publicly traded corporations in America are incorporated under corporate administration friendly Delaware law, and because America's wealth has been increasingly securitized into corporate entities, the rights of owners and shareholders have become derived and dissipated. The concerns of shareholders over administration pay and stock losses periodically has led to more frequent calls for Corporate Governance reforms. In the first half of the 1990's the issue of corporate governance received considerable press attention due to the wave of CEO dismissals (e.g.: IBM, Kodak, Honeywell) by their boards. CALPERS led a wave of shareholder activism, as a way to ensure that value would not be destroyed by the traditionally cozy relationship between the CEO and the boards of directors. In the second half of the 1990's, during the Asian financial crisis, a lot of the attention fell into the corporate governance systems of the developing world.

Parties to corporate governance

Parties involved in corporate governance include the governing or regulatory body (e.g. the U.S. Securities and Exchange Commission), the Chief Executive Officer, the board of directors, management and shareholders. Other stakeholders who take part include suppliers, employees, creditors, customers and the community at large. In corporations, the principal (shareholder) delegates decision rights to the agent (manager) to act in the principal's best interests. This separation of ownership from control implies a loss of effective control by shareholders over managerial decisions. Partly as a result of this separation between the main two parties, a system of corporate governance controls is implemented to assist in aligning the incentives of managers with those of shareholders, in order to limit the self-satisfying opportunities for managers. With the significant increase in equity holdings of institutional investors, there has been an opportunity for a reversal of the separation of ownership and control problems because ownership is not so diffuse. A board of directors often plays a key role in corporate governance. It is their responsibility to endorse the organisation's strategy, develop directional policy, appoint, supervise and remunerate senior executives and to ensure accountability of the organisation to its owners and authorities. Individuals may be members of the board of directors of multiple corporations. All parties to corporate governance have an interest, whether direct or indirect, in the effective performance of the organisation. Directors, workers and management receive salaries, benefits and reputation; whilst shareholders receive capital return. Customers receive goods and services; suppliers receive compensation for their goods or services. In return these individuals provide value in the form of natural, human, social and other forms of capital. A key factor in an individual's decision to participate in an organisation (e.g. through providing financial capital or expertise or labor) is trust that they will receive a fair share of the organisational returns. If some parties are receiving more than their fair return (e.g. exorbitant executive remuneration), then participants may choose to not continue participating...potentially leading to organisational collapse (e.g. shareholders withdrawing their capital). Corporate governance is the key mechanism through which this trust is maintained across all stakeholders.

Principles

Key elements of good corporate governance principles include honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to the organisation. Of importance is how directors and management develop a model of governance that aligns the values of the corporate participants and then evaluate this model periodically for its effectiveness. In particular, senior executives should conduct themselves honestly and ethically, especially concerning actual or apparent conflicts of interest, and disclosure in financial reports. Commonly accepted principles of corporate governance include:
- Rights of, and equitable treatment of, shareholders: Organisations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings.
- Interests of other stakeholders: Organisations should recognise that they have legal and other obligations to all legitimate stakeholders.
- Role and responsibilities of the board: The board needs a range of skills and understanding - to be able to deal with various business issues and have the ability to review and challenge management performance. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix of executive and non-executive directors. The key roles of chairperson and CEO should not be held by the same person.
- Integrity and ethical behaviour: Organisations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. It is important to understand, though, that systemic reliance on integrity and ethics is bound to eventual failure.
- Disclosure and transparency: Organisations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organisation should be timely and balanced to ensure that all investors have access to clear, factual information. Issues involving corporate governance principles include:
- oversight of the preparation of the entity's financial statements
- internal controls and the independence of the entity's auditors
- review of the compensation arrangements for the chief executive officer and other senior executives
- the way in which individuals are nominated for positions on the board
- the resources made available to directors in carrying out their duties
- oversight and management of risk

Mechanisms and controls

Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection. For example, to monitor managers' behaviour, an independent third party (the auditor) attests the accuracy of information provided by management to investors. An ideal control system should regulate both motivation and ability.

Internal corporate governance controls

Internal corporate governance controls monitor activities and then take corrective action to accomplish organisational goals. Examples include:
- Monitoring by the board of directors: The board of directors, with its legal authority to hire, fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Whilst non-executive directors are thought to be more independent, they may not always result in more effective corporate governance. Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm's executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes, ex ante. It could be argued, therefore, that executive directors look beyond the financial criteria.
- Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behaviour, and can elicit myopic behaviour.
- Audit committees

External corporate governance controls

External corporate governance controls encompass the controls external stakeholders exercise over the organisation. Examples include:
- debt covenants
- external auditors
- government regulations

Systemic problems of corporate governance

- Supply of accounting information: Financial accounts form a crucial link in enabling providers of finance to monitor directors. Imperfections in the financial reporting process will cause imperfections in the effectiveness of corporate governance. This should, ideally, be corrected by the working of the external auditing process, but lack of auditor independence may prevent this.
- Demand for information: A barrier to shareholders using good information is the cost of processing it, especially to a small shareholder. The traditional answer to this problem is the efficient market hypothesis, which suggests that the small shareholder will free-ride on the judgements of larger professional investors. However, there is an expanding empirical literature on apparent departures from this.
- Monitoring costs: In order to influence the directors, the shareholders must combine with others to form a significant voting group which can pose a real threat of carrying resolutions or appointing directors at a general meeting. The costs of combining in this way might well be prohibitive relative to the benefits.

Role of the accountant

Financial reporting is a crucial element necessary for the corporate governance system to function effectively. Accountants and auditors are the primary providers of information to capital market participants. The directors of the company should be entitled to expect that management prepare the financial information in compliance with statutory and ethical obligations, and rely on auditors' competence. Current accounting practice allows a degree of choice of method in determining the method of measurement, criteria for recognition, and even the definition of the accounting entity. The exercise of this choice to improve apparent performance (popularly known as creative accounting) imposes extra information costs on users. In the extreme, it can involve non-disclosure of information. One area of concern is whether the accounting firm acts as both independent auditor and management consultant to the firm they are auditing. This may result in a conflict of interest which places the integrity of financial reports in doubt due to client pressure to appease management. The power of the corporate client to initiate and terminate management consulting services and, more fundamentally, to select and dismiss accounting firms contradicts the concept of an independant auditor. The Enron collapse is an example of misleading financial reporting. Enron concealed huge losses by creating illusions that a third party was contractually obliged to pay the amount of any losses. However, the third party was an entity in which Enron had a substantial economic stake. In discussions of accounting practices with Arthur Andersen, the partner in charge of auditing, views inevitably led to the client prevailing. However, good financial reporting is not a sufficient condition for the effectiveness of corporate governance if users don't process it, or if the informed user is unable to exercise a monitoring role due to high costs (see Systemic problems of corporate governance above).

Regulation

See regulation.

Self-regulation

Rules versus principles

Rules are typically thought to be simpler to follow than principles, demarcating a clear line between acceptable and unacceptable behaviour. Rules also reduce discretion on the part of individual managers or auditors. In practice rules can be more complex than principles. They may be ill-equipped to deal with new types of transactions not covered by the code. Moreover, even if clear rules are followed, one can still find a way to circumvent their underlying purpose - this is harder to achieve if one is bound by a broader principle.

Enforcement

Enforcement can affect the overall credibility of a regulatory system. They both deter bad actors and level the competitive playing field. Nevertheless, greater enforcement is not always better, for taken too far it can dampen valuable risk-taking.

Corporate governance models around the world

There are many different models of corporate governance around the world. These differ according to the variety of capitalism in which they are embedded. The liberal model that is common in Anglo-American countries tends to give priority to the interests of shareholders. The coordinated model that one finds in Continental Europe and Japan also recognizes the interests of workers, managers, suppliers, customers, and the community. Both models have distinct competitive advantages, but in different ways. The liberal model of corporate governance encourages radical innovation and cost competition, whereas the coordinated model of corporate governance facilitates incremental innovation and quality competition. In the United States, a corporation is governed by a board of directors, which has the power to choose an executive officer, usually known as the chief executive officer. The CEO has broad power to manage the corporation on a daily basis, but needs to get board approval for certain major actions, such as hiring his/her immediate subordinates, raising money, acquiring another company, major capital expansions, or other expensive projects. Other duties of the board may include policy setting, decision making, monitoring management's performance, or corporate control. The board of directors is nominally selected by and responsible to the shareholders, but the bylaws of many companies make it difficult for all but the largest shareholders to have any influence over the makeup of the board; normally, individual shareholders are not offered a choice of board nominees among which to choose, but are merely asked to rubberstamp the nominees of the sitting board. Perverse incentives have pervaded many corporate boards in the developed world, with board members beholden to the chief executive whose actions they are intended to oversee. Frequently, members of the boards of directors are CEO's of other corporations, which some see as a conflict of interest.

Codes and guidelines

Corporate governance principles and codes have been developed in different countries and issued from stock exchanges, corporations, institutional investors, or associations (institutes) of directors and managers with the support of governments and international organizations. As a rule, compliance with these governance recommendations is not mandated by law, although the codes linked to stock exchange listing requirements may have a coercive effect. For example, companies quoted on the London and Toronto Stock Exchanges formally need not follow the recommendations of their respective national codes. However, they must disclose whether they follow the recommendations in those documents and, where not, they should provide explanations concerning divergent practices. Such disclosure requirements exert a significant pressure on listed companies for compliance. In contrast, the guidelines issued by associations of directors, corporate managers and individual companies tend to be wholly voluntary. For example, The GM Board Guidelines reflect the company’s efforts to improve its own governance capacity. Such documents, however, may have a wider multiplying effect prompting other companies to adopt similar documents and standards of best practice.

Corporate governance and firm performance

In its 'Global Investor Opinion Survey' of over 200 institutional investors first undertaken in 2000 and updated in 2002, McKinsey found that 80% of the respondents would pay a premium for well-governed companies. They defined a well-governed company as one that had mostly out-side directors, who had no management ties, undertook formal evaluation of its directors, and was responsive to investors' requests for information on governance issues. The size of the premium varied by market, from 11% for Canadian companies to around 40% for companies where the regulatory backdrop was least certain (those in Morocco, Egypt and Russia). Other studies have linked broad perceptions of the quality of companies to superior share price performance. In a study of five year cumulative returns of Fortune Magazine's survey of 'most admired firms', Antunovich et al found that those "most admired" had an average return of 125%, whilst the 'least admired' firms returned 80%. In a separate study Business Week enlisted institutional investors and 'experts' to assist in differentiating between boards with good and bad governance and found that companies with the highest rankings had the highest financial returns. On the other hand, research into the relationship between specific corporate governance controls and firm performance has been mixed and often weak. The following examples are illustrative.

Board composition

Some researchers have found support for the relationship between frequency of meetings and profitability. Others have found a negative relationship between the proportion of external directors and firm performance, while others found no relationship between external board membership and performance. In a recent paper Bagahat and Black found that companies with more independent boards do not perform better than other companies. It is unlikely that board composition has a direct impact on firm performance.

Remuneration

The results of previous research on the relationship between firm performance and executive compensation have failed to find consistent and significant relationships between executives' remuneration and firm performance. Low average levels of pay-performance alignment do not necessarily imply that this form of governance control is inefficient. Not all firms experience the same levels of agency conflict, and external and internal monitoring devices may be more effective for some than for others. Some researchers have found that the largest CEO performance incentives came from ownership of the firm's shares, while other researchers found that the relationship between share ownership and firm performance was dependent on the level of ownership. The results suggest that increases in ownership above 20% cause management to become more entrenched, and less interested in the welfare of their shareholders. Firm performance has been found to be positively associated with share option plans. These plans direct managers' energies and extend their decision horizons toward the long-term, rather than the short-term, performance of the company.

Attention to corporate governance

Corporate governance issues are receiving greater attention in both developed and developing countries as a result of the increasing recognition that a firm’s corporate governance affects both its economic performance and its ability to access long-term, low-cost investment capital. In response to calls by OECD ministers, a revised version of its "Principles of Corporate Governance" was produced in 2004. Numerous high-profile cases of corporate governance failure have focused the minds of governments, companies and the general public on the threat posed to the integrity of financial markets, although it is not clear that any system will or should prevent business failures, or that it is possible to provide a guarantee against fraud. Corporate Governance concerns have been widely studied. For the United States, an analysis of these concerns has been published by the New York Society of Securities Analysts in their 2003 Corporate Governance Handbook. What constitutes good and bad corporate governance is an on-going debate in politics, civil society, and academia. For an international survey of the scientific literature see [http://ssrn.com/abstract=343461 Becht, Bolton and Roell 2002]. The OECD publishes an annual paper on corporate governance. First issued in 1999, this paper has provided the framework for regional corporate governance roundtables in cooperation with the World Bank around the world. It has been endorsed as one of the Financial Stability Forum's 12 key standards, and form the basis for the World Bank's Review of Observance of Standards and Codes.

Foot notes

- [http://theyrule.net Theyrule.net]
- [http://www.oecd.org/dataoecd/32/18/31557724.pdf OECD Principles of Corporate Governance]

References

- Becht, Marco, Bolton, Patrick and Roell, Ailsa A., "Corporate Governance and Control" (October 2002). ECGI - Finance Working Paper No. 02/2002. [http://ssrn.com/abstract=343461 SSRN 343461]
- Brickley, James A., William S. Klug and Jerold L. Zimmerman, Managerial Economics & Organizational Architecture, ISBN 0072828099
- [http://en.wikipedia.org/wiki/Sir_Adrian_Cadbury Cadbury, Sir Adrian], "The Code of Best Practice", Report of the Committee on the Financial Aspects of Corporate Governance, Gee and Co Ltd, 1992.
- [http://en.wikipedia.org/wiki/Sir_Adrian_Cadbury Cadbury, Sir Adrian], "Corporate Governance : Brussels", Instituut voor Bestuurders, Brussels, 1996.
- [http://en.wikipedia.org/wiki/Thomas_Clarke Clarke, Thomas] (ed.) (2004) "Theories of Corporate Governance: The Philosophical Foundations of Corporate Governance," London and New York: Routledge, ISBN 041532307X
- [http://en.wikipedia.org/wiki/Thomas_Clarke Clarke, Thomas] (ed.) (2004) "Critical Perspectives on Business and Management: 5 Volume Series on Corporate Governance - Genesis, Anglo-American, European, Asian and Contemporary Corporate Governance" London and New York: Routledge, ISBN 0415329108
- Colley, J., Doyle, J., Logan, G., Stettinius, W., What is Corporate Governance ? (McGraw-Hill, December 2004) ISBN 0071444483
- [http://en.wikipedia.org/wiki/Frank_Easterbrook Easterbrook, Frank H.] and Daniel R. Fischel, The Economic Structure of Corporate Law, ISBN 0674235398
- Erturk, Ismail, Froud, Julie, Johal, Sukhdev and Williams, Karel (2004) Corporate Governance and Disappointment Review of International Political Economy, 11 (4): 677-713.
- Monks, Robert A.G. and Minow, Nell, Corporate Governance (Blackwell 2004) ISBN 1405116986
- Monks, Robert A.G. and Minow, Nell, Power and Accountability (HarperBusiness 1991), full text available [http://www.thecorporatelibrary.com/power/contents.html online]
- New York Society of Securities Analysts, 2003, Corporate Governance Handbook, [http://www.nyssa.org/Template.cfm?Section=corp_gov_com&Template=/TaggedPage/TaggedPageDisplay.cfm&TPLID=3&ContentID=499]
- [http://en.wikipedia.org/wiki/OECD OECD] (1999, 2004) Principles of Corporate Governance Paris: OECD
- Whittington, G. "Corporate Governance and the Regulation of Financial Reporting", Accounting and Business Research, Vol. 2, 1993, Corporate Governance Special Issue, pp. 311-319.

External sources

- [http://www.corpgov.net/ Corporate Governance (corpgov.net)], with various [http://www.corpgov.net/library/definitions.html definitions] of corporate governance
- [http://www.corpgov.hbs.edu Corporate Governance Initiative] at the Harvard Business School
- [http://www.thecorporatelibrary.com Corporate Library]
- [http://www.ecgi.org European Corporate Governance Institute], an international scientific not-for-profit association
- ECGI [http://www.ecgi.org/codes corporate governance codes, principles and recommendations]
- [http://www.oceg.org Open Compliance and Ethics Group], a not-for-profit organisation
- [http://www.ssrn.com/ Social Science Research Network (SSRN)] - related papers
- [http://www.ccg.uts.edu.au UTS Centre for Corporate Governance] at the University of Technology, Sydney, Australia
- [http://rru.worldbank.org/PapersLinks/Corporate-Governance-Policy/ World Bank Policy on Corporate Governance.]
- [http://www.zicklincenter.org Zicklin Center for Business Ethics Research] at the Wharton School of the University of Pennsylvania Category:Corporations law Category:Management Category:Corporate governance ja:コーポレートガバナンス

Corporation

A corporation is a legal entity (distinct from a natural person) that often has similar rights in law to those of a natural person. Civil law systems may refer to corporations as "moral persons;" they may also go by the name "AS" (anonymous society) or something similar, depending on language (see below). In colloquial usage, "corporation" usually refers to a commercial entity set up in accordance with a governmental framework. Churches (mainly in US, but not so much in other countries, where Churches have a different status), interest groups (both can form as not-for-profit corporations or can exist as voluntary associations), cities and townships (often chartered as public corporations), among others, may also have historically lengthy corporate identities.

Legal status

The law typically views a corporation as a fictional person, a legal person, or a moral person (as opposed to a natural person); United States law recognises this as corporate personhood. Under such a doctrine (obviously a legal fiction), a corporation enjoys many of the rights and obligations of individual citizens, such as the ability to own property, sign binding contracts, pay taxes, have certain constitutional rights, and otherwise participate in society. (Note that corporations do not possess all the rights appertaining to individuals: in most jurisdictions, for example, a corporation cannot vote.) In common law countries, the classic statement of this principle is found in Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915], where Lord Haldane said: :"My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation." The most salient features of incorporation include: #Limited Liability. Unlike in a partnership, stockholders of a corporation hold no liability for the corporation's debts and obligations: see leading case in common law, Salomon v. Salomon & Co.. As a result their "limited" potential losses cannot exceed the amount which they paid for the stock. Not only does this allow corporations to engage in risky enterprises, but limited liability also forms the basis for trading in corporate stock. Without the limitation on the amount that an investor can lose, the time and effort required to determine whether the stock could wipe the investor out would render the stock market very illiquid (as one can observe in the very illiquid market for partnership interests). A lender can, however, require a personal guarantee on a loan to a corporation, thus introducing personal liability. #Perpetual Lifetime. The assets and structure of the corporation exist beyond the lifetime of any of its shareholders, officers or directors. This allows for stability of capital, which thus becomes available for investment in projects of a larger size and over a longer term than if the corporate assets remained subject to dissolution and distribution. This feature also had great importance in the medieval period, when land donated to the Church (a corporation) would not generate the feudal fees that a lord could claim upon a landholder's death. In this regard, see Statute of Mortmain. #Profit Maximization. In Anglo-American jurisdictions, business corporations are generally required to serve the best interests of the shareholders, a rule that courts have generally interpreted to mean the maximization of share value, and thus profits. Corporate directors are prohibited by corporate law from sacrificing profits to serve some other interest. Originally this included such areas as environmental protection, or the improvement of the welfare of the community. For example, when Henry Ford cut dividends and reduced car prices in order to increase the number of people who could afford to buy his cars, his brother-in-law, Mr. Dodge, a shareholder, sued him for having harmed profitability: Dodge v. Ford Motor Company, 170 N.W 688 (Mich.S.C. 1919). Mr. Dodge succeeded and went on to form his own car company with the proceeds of the suit. However, modern law by statutes and court decisions holds that a corporation does have an implied authority to make charitable contributions to society.

Ownership and control

Humans and other legal entities (such as trusts and other corporations) can hold shares. When no stockholders exist, a corporation may exist as a "non-stock corporation", a "membership corporation", or similar — this second type of corporation counts as a not-for-profit corporation. In either category, the corporation comprises a collective of individuals with a distinct legal status and with special privileges not vouchsafed to ordinary unincorporated businesses, to voluntary associations, or to groups of individuals. Typically, a board of directors governs a corporation on the stockholders' behalf. The board has a fiduciary duty to look after the interests of the corporation. The corporate officers such as the CEO, president, treasurer, and other titled officers are chosen by the board to manage the affairs of the corporation. Corporations can also be controlled (in part) by creditors such as banks. In return for lending money to the corporation, creditors can demand a control interest analogous to that of a shareholder, including one or more seats on the board of directors. Creditors are not said to "own" the corporation as shareholders do, but can outweigh the shareholders in practice, especially if the corporation is experiencing financial difficulties and cannot survive without credit. Shareholders in a corporation are said to have a "residual interest." Should the corporation end its existence, the shareholders are the last to receive its assets, following creditors and others with interests in the corporation. This can make investment in a corporation risky; however, the risk is outweighed by the corporation's limited liability, which ensures that the shareholder will only be liable for the amount they invested.

Formation

Historically, corporations were created by special charter of state governments. Today, corporations are usually registered with a state, and become regulated by the laws enacted by that state. Registration is the main prerequisite to the corporation's assumption of limited liability. As part of this registration, it must designate the principal address of the corporation (where to contact it in the event of legal process), and often an agent or other legal representative of the corporation. Generally, a corporation files articles of incorporation with the government, laying out the general nature of the corporation, the amount of stock it is authorized to issue, and the names and addresses of directors. Once the articles are approved, the corporation's directors meet to create bylaws that govern the internal functions of the corporation, such as meeting procedures and officer positions. The law of the state in which a corporation operates will regulate most of its internal activities, as well as its finances. If a corporation operates outside its home state, it is often required to register with other governments as a foreign corporation, and is almost always subject to laws of its host state pertaining to employment, crimes, contracts, civil actions, and the like.

Naming

Corporations generally have a distinct name. Historically, corporations were named after their membership: for instance, "The President and Fellows of Harvard College." Nowadays, corporations in most jurisdictions have a distinct name that does not need to make reference to their membership. In Canada, this possibility is taken to its logical extreme: many smaller Canadian corporations have no names at all, merely numbers (e.g., "Ontario 123-4567 Limited"). In most countries, corporate names include the term "Corporation", or an abbreviation that denotes the corporate status of the entity. See Types of corporations for a full list. These terms, known as words of limitation, obviously vary by jurisdiction and language. Their use puts all persons on constructive notice that they have to deal with an entity whose liability remains limited, in the sense that it does not reach back to the persons who constitute the entity; one can only collect from whatever assets the entity still controls at the time one obtains a judgment against it. Certain jurisdictions do not allow the use of the word "company" alone to denote corporate status, since the word "company" may refer to a partnership or to a sole proprietorship, or even, archaically, to a group of not necessarily related people (for example, those staying in a tavern).

Unresolved issues

The nature of the corporation continues to evolve, both through existing corporations pushing new ideas and structures, and governments regulating them in response to new situations. A current question is that of diffused responsibility: for example, if the corporation is found liable for a death, then how should the blame and punishment for this be allocated across the shareholders, directors, management and staff of the corporation? The present law diffuses this responsibility. One may think that the owners of the business - the shareholders - should be ultimately responsible for such circumstances, but the modern corporation may have many millions of small-scale shareholders who know nothing about its business activities. Worse still, traders - especially hedge funds - may rapidly turn over their partial ownership of a corporation many times a day. One suggestion is that the directors should be passed the burden of moral and legal responsibility as part of their job of representing the shareholders. This is currently an active area of debate.

Origins

Etymology

The word "corporation" derives from the Latin corpus (body), representing a "body of people"; that is, a group of people authorized to act as an individual (Oxford English Dictionary). The word universitas also used to refer to a group of people but now refers specifically to a group of scholars (see University). In the United Kingdom and Republic of Ireland, the term corporation was also used for the local government body in charge of a borough. This style was replaced in most cases with the term council in the United Kingdom in 1973, and in the Republic of Ireland in 2001. The sole exception is the Corporation of London which retains the title.

Pre-modern corporations

Corporations have been present in some forms as far back as Ancient Rome. Although devoid of some of the core characteristics by which corporations are known today, they nonetheless were enterprises, sanctioned by the state, with a form of shareholders who invested money for a specific purpose. With the collapse of the Roman Empire, the rise of Christianity and the influx of Germanic tribes, the Roman conception of the corporation merged with other views. Germanic tribes, for example, maintained that a group entity in and of itself could have a separate identity from that of its members. These influences came together in the body of canon law built around the conception of the church as corporate structure in the Middle Ages. Different theories of the church as corporate body were favored by different individuals but all agreed on one key component: that the church was more than just its members and could maintain an existence perpetually, regardless of the death of any individual member. This, together with discussion as to the relationship between the head of a corporation (such as the Pope) and its members, contributed not only to the development of modern corporations and corporate theory but also set the stage for many ideas that would come to fruition during the enlightenment. Kenneth Pomeranz, an economic historian, argues that the need to perform pseudo-governmental operations (such as the waging of war) accounts for the development of this economic structure in Europe but not in China or in the Middle East. Older corporate entities gained incorporation as "the person/people of xx". This reflected the people who made up the "body" and also emphasised their legal identity. The law classifies a corporation either as a corporation sole (one person) or as a corporation aggregate (any other number). Examples include (the link gives the legal name; the nickname appears in brackets with the nature of the corporation)
- The Governor and Company of the Bank of England (Bank of England — corporation aggregate)
- The Chancellor Masters and Scholars of the University of Cambridge (Cambridge University — corporation aggregate)
- The President and Fellows of Harvard College (Harvard College — corporation aggregate)
- Her Majesty the Queen in Right of New Zealand (New Zealand Government — corporation sole)
- The Archbishop of Canterbury (corporation sole)
- The Dean, Chapter and Students of the Cathedral Church of Christ in Oxford of the Foundation of King Henry VIII (Christ Church, Oxford — corporation aggregate) Using strict definitions, universities and colleges count as corporations since they merely comprise groups of people.

Development of modern commercial corporations

college, dating from 7 November 1623, for the amount of 2,400 florins]] Early corporations of the commercial sort were formed under frameworks set up by governments of states to undertake tasks which appeared too risky or too expensive for individuals or governments to embark upon. The alleged oldest commercial corporation in the world, the Stora Kopparberg mining community in Falun, Sweden, reportedly obtained a charter from King Magnus Eriksson in 1347. Many European nations chartered corporations to lead colonial ventures, such as the Dutch East India Company, and these corporations came to play a large part in the history of corporate colonialism. In the United States, government chartering began to fall out of vogue in the mid-1800s. Corporate law at the time was very restrictive and very closely regulated by the states. Forming a corporation usually required an act of legislature. Investors generally had to be given an equal say in corporate governance, and the corporation's activities were tightly restricted to its express purposes. Many private firms in the 19th century avoided the corporate model for these reasons (Andrew Carnegie formed his steel operation as a limited partnership, and John D. Rockefeller set up Standard Oil as a trust). Eventually, state governments began to realize the economic value of providing more permissive corporate laws. New Jersey was the first state to adopt an "enabling" corporate law, with the goal of attracting more business to the state. Delaware followed, and soon became known as the most corporation-friendly state in the country; even today, most major public corporations are set up under Delaware law. The 20th century saw a proliferation of enabling law across the world, which helped to drive economic booms in many countries before and after World War I. After World War II, and especially starting in the 1980s, many countries with large state-owned corporations moved toward privatization, the selling of publicly-owned services and enterprises to private, normally corporate, ownership. Deregulation - reducing the public-interest regulation of corporate activity - often accompanied privatization as part of an ideologically laissez-faire policy. Another major postwar shift was toward conglomerates, in which large corporations purchased smaller corporations to expand their industrial base. Japanese firms developed a horizontal conglomeration model, the keiretsu, which was later duplicated in other countries as well. While corporate efficiency (and profitability) skyrocketed, small shareholder control was diminished and directors of corporations assumed greater control over business, contributing in part to the hostile takeover movement of the 1980s and the accounting scandals that brought down Enron and WorldCom following the turn of the century. More recent corporate developments include downsizing, contracting-out or out-sourcing, off-shoring and scoping down activities to core business, as information technology, global trade regimes, and cheap fossil fuels enable corporations to reduce labour costs, transportation costs and transaction costs, and thereby maximize profits. For a history of corporations that is “pro-corporate”, see John Micklethwait and Adrian Wooldridge, The Company: a Short History of a Revolutionary Idea (New York: Modern Library, 2003). For a history of corporations that is “critical”, see Joel Bakan, The Corporation. The pathological pursuit of profit and power (Toronto: Viking Canada, 2004).

Types of corporations

For-profit and non-profit

Main article: non-profit organization In modern economic systems, the corporate conventions of governance commonly appear in a wide variety of business and non-profit activities. Though the laws governing these creatures of statute often differ, the courts often interpret provisions of the law that apply to profit-making enterprises in the same manner (or in a similar manner) when applying principles to non-profit organizations — as the underlying structures of these two types of entity often resemble each other.

Closely-held and public

The institution most often referenced when the word "corporation" is used, as in the title of the movie The Corporation, is a public or publicly traded corporation, the shares of which are traded on a public market (e.g., the New York Stock Exchange or Nasdaq) designed specifically for the buying and selling of shares of stock of corporations by and to the general public. Most of the largest businesses in the world are publicly traded corporations. However, the majority of corporations are said to be closely held, privately held or close corporations, meaning that no ready market exists for the trading of ownership interests. Many such corporations are owned and managed by a small group of businesspeople or companies, although the size of such a corporation can be as vast as the largest public corporations. The affairs of publicly traded and closely held corporations are similar in many respects. The main difference in most countries is that publicly traded corporations have an additional burden of complying with securities laws, which (especially in the U.S.) grant further rights to stockholders to protect them from fraud or unfairness in connection with the sale and purchase of stock. The publicly traded corporation must usually follow much more stringent disclosure requirements, and sometimes additional procedural obligations in connection with major transactions (e.g. mergers) or events (e.g. elections of directors).

Multinational corporations

Following on the success of the corporate model at a national level, many corporations have become transnational or multinational corporations: growing beyond national boundaries to attain sometimes remarkable positions of power and influence in the process of globalising. The typical "transnational" or "multinational" may fit into a web of overlapping ownerships and directorships, with multiple branches and lines in different regions, many such sub-groupings comprising corporations in their own right. Growth by expansion may favour national or regional branches; growth by acquisition or merger can result in a plethora of groupings scattered around and/or spanning the globe, with structures and names which do not always make clear the structures of ownership and interaction. In the spread of corporations across multiple continents, the importance of corporate culture has grown as a unifying factor and a counterweight to local national sensibilities and cultural awareness.

National features

There are various types of corporations throughout the world.

United States

In the United States, several corporate forms exist; the name of "corporation" generally applies to a business, run for profit, to which one of the states of the United States has granted a corporate charter. American corporations often charter as a Delaware Corporation in Delaware, which charges no tax on activities outside the state and has courts experienced in commercial law. Corporations set up for privacy or asset protection often charter in Nevada, which allows setting them up with no record of who owns them. The federal government of the United States usually does not grant corporate charters, except for some special instances such as Amtrak and Freddie Mac and banks and credit unions which opt not to receive charters from their home states. Historically, most U.S. states issued charters for fixed lengths of time (for example, a manufacturing corporation might receive a charter good for 40 years), and only by an act of the legislature. In theory, a limited charter forced corporations to remain accountable to government (that is, to the community) for the special privileges granted to them. Investors protested that it actually led to unhealthy amounts of political payoffs and graft. Most states now charter unlimited-term corporations for a small fee, and possibly for a yearly tax. Legally, corporations are accorded some corporate personhood, i.e. Constitutional rights similar to those held by persons. The U.S. Supreme Court ruled on this question in the 1886 case Santa Clara County v. Southern Pacific Railroad. Many countries around the world now have corporate laws based upon state laws from the United States. For example, corporations in Japan are organized under a variant of the corporate law of Illinois, and corporations in Saudi Arabia follow corporate laws copied from New York. The oldest corporation in the United States, and the oldest in North America, is the President and Fellows of Harvard College (also known as the Harvard Corporation), chartered in 1650.

Canada

In Canada both the federal government and the provinces have corporate statutes, and thus a corporation may have a provincial or a federal charter. Many older corporations in Canada stem from Acts of Parliament passed before the introduction of general corporation law. The oldest corporation in Canada, and second oldest in North America, is the Hudson's Bay Company, chartered in 1670. Federally recognized corporations are regulated by the Canada Business Corporations Act

German-speaking countries

Germany, Austria and Switzerland recognize two forms of corporation: the Aktiengesellschaft (AG), analogous to public corporations in the English-speaking world, and the Gesellschaft mit beschränkter Haftung (GmbH), similar to (and an inspiration for) the modern limited liability company.

Corporate taxation

In many countries, including the United States and United Kingdom, corporate profits are taxed at a corporate tax rate, and dividends paid to shareholders are taxed at a separate rate. Such a system is sometimes referred to as "double taxation," because any profits distributed to shareholders will eventually be taxed twice. One solution to this (as in the case of UK tax system) is for the recipient of the dividend to be entitled to a tax credit which addresses the fact that the profits represented by the dividend have already been taxed. The company profit being passed on is therefore effectively only taxed at the rate of tax paid by the eventual recipient of the dividend. Where a double taxation system exists, the additional tax burden is often an incentive for smaller businesses to organize in the form of a partnership, limited liability company, or other type of entity that is not separately taxed. Such entities are often called "pass-through entities." In the United States, business corporations owe taxes according to two basic categories. A "C corporation" must pay corporate taxes, while "S corporations" pay no corporate taxes but instead pass profits and losses directly to their owners (the stockholders) who declare such profits and losses as part of their personal taxable income. An S corporation must generally have no more than 100 stockholders, who must be natural persons (not other corporations or entities), must reside in the United States, and must consent to the classification; moreover, the S corporation can only issue a single class of stock. As a result of these restrictions, all publicly traded corporations and many larger close corporations have C corporation status. Certain kinds of investment companies are also exempt from corporate income taxes, provided they distribute almost all of their income to shareholders in the form of dividends or capital gains distributions.

Other commercial entities

Several other forms of business entity exist under the laws of various countries. These include:
- Partnership
- Limited partnership (LP)
- Limited liability partnership (LLP)
- Limited liability company (LLC)
- Sole proprietorship

Quotes

- Corporations have neither bodies to be punished, nor souls to be condemned, they therefore do as they like. —Lord Thurlow
- An ingenious device for obtaining individual profit without individual responsibility. —"Corporation" as defined by Ambrose Bierce in The Devil's Dictionary
- The opinion of the Court, after mature deliberation, is that this [a corporate charter] is a contract, the obligation of which cannot be impaired without violating the Constitution of the United States. —Chief Justice John Marshall, Dartmouth College v. Woodward (1819).

External links

- [http://www.econlib.org/library/Enc/Corporations.html Corporations] — article by Robert Hessen
- [http://www.company-formation-glossary.co.uk Company Formation Glossary]
- [http://www.ukcorporator.co.uk/guidance/G59.php Standard UK Company Formation Configurations]
- [http://www.gangsofamerica.com/ Gangs of America by Ted Nace] — A free book on historical and legal bases of Corporations Category:Business law Category:Corporations law Category:Legal entities Category:Types of companies ko:주식회사 ja:株式会社

Shareholder

A shareholder or stockholder is an individual or company (including a corporation), that legally owns one or more shares of stock in a joint stock company. The shareholders are the owners of a corporation. Companies listed at the stock market strive to enhance shareholder value. The shareholder concept is the theory that a company only has responsibilities to its shareholders and owners, and should work solely to benefit these people. Stockholders are granted special privileges depending on the class of stock, including the right to vote (usually one vote per share owned) on matters such as elections to the board of directors, the right to share in distributions of the company's income, the right to purchase new shares issued by the company, and the right to a company's assets during a liquidation of the company. However, stockholder's rights to a company's assets are subordinate to the rights of the company's creditors. This means that stockholders typically receive nothing if a company is liquidated after bankruptcy (if the company had had enough to pay its creditors, it would not have entered bankruptcy), although a stock may have value after a bankruptcy if there is the possibility that the debts of the company will be restructured. Stockholders or shareholders are considered by some to be a partial subset of stakeholders, which may include anyone who has a direct or indirect equity interest in the business entity or someone with even a non-pecuniary interest in a non-profit organization. Thus it might be common to call volunteer contributors to an association stakeholders, even though they are not shareholders. Although directors and officers of a company are bound by fiduciary duties to act in the best interest of the shareholders, the shareholders themselves normally do not have such duties towards each other. However, in a few unusual cases, some courts have been willing to imply such a duty between shareholders. For example, in California, majority shareholders of closely held corporations have a duty to not destroy the value of the shares held by minority shareholders. See Jones v. H. F. Ahmanson & Co., 1 Cal. 3d 93 (1969) [http://online.ceb.com/calcases/C3/1C3d93.htm]. The largest shareholders (in terms of percentages of companies owned) are often mutual funds, and especially passively managed exchange-traded funds.

Board of directors

A board of directors, also called board of trustees, board of governors, board of managers, or board of curators, is a group of individuals who govern the affairs of a corporation. Board members in most legal jurisdictions have specific fiduciary duties whereby they must act for the benefit of the corporation. A board is either self-perpetuating or elected by the members of the corporation. In the case of an incorporated joint-stock company, the board is almost always elected by the members (shareholders) of the company. Individuals can be members of the board of directors of multiple corporations at one time. The main duties of the board are to choose the chief executive officer and other officers to run the day-to-day operations of the corporation and to exercise high-level oversight. Typically corporate boards are involved in issues of ownership, strategy, financing, and mergers and acquisitions. The actual power held by the board of directors varies widely from corporation to corporation. In some, the board of directors form a powerful body to which senior management is subservient. Other times, the board is a formality which merely rubber stamps decisions of the CEO and senior management. The board is run by the chairman of the board. Often the CEO serves concurrently as the chairman. Some hold that this is inappropriate in a publicly-traded joint-stock company, for, they contend, it gives management too much power over the board, which is supposed to provide oversight of management. Larger boards are partitioned into several committees with specific tasks. For example, a compensation committee is commonly formed to make decisions regarding salary and stock allocations for top management (and sometimes for the entire employee pool). Others might include an audit committee, a legal affairs committee, and a mergers and acquisitions committee. A board will often consist of executive and non-executive directors. Executive directors play an active part in running the company, while non-executive directors are only there to offer advice. It is widely considered good management practice to create a board of directors with persons with expertise from diverse backgrounds and to have outside directors or non-executive directors who can provide a perspective on a situation which is independent from management. For example it is extremely common for a good percentage of the boards of most large corporations to be from academia, especially business schools. Sometimes relatives of powerful politicians are selected to serve on boards, such as when Hillary Clinton served on the board at Arkansas-based Wal-Mart while her husband, Bill, was Governor of Arkansas.

Failures

While the primary responsibility of boards is to ensure that the corporation's management is performing its job correctly, actually achieving this in practice can be difficult. In a number of "corporate scandals" of the 1990s, one notable feature revealed in subsequent investigations is that boards were not aware of the activities of the managers that they hired, and the true financial state of the corporation. A number of factors may be involved in this tendency:
- Most boards largely rely on management to report information to them, thus allowing management to place the desired 'spin' on information, or even conceal or lie about the true state of a company.
- Boards of directors are part-time bodies, whose members meet only occasionally and may not know each other particularly well. This unfamiliarity can make it difficult for board members to question management.
- CEOs tend to be rather forceful personalities. In some cases, CEOs are accused of exercising too much influence over the company's board.
- Directors may not have the time or the skills required to understand the details of corporate business, allowing management to obscure problems.
- The same directors who appointed the present CEO oversee their performance. This makes it difficult for some directors to dispassionately evaluate the CEO's performance.
- Directors often feel that a judgement of a manager, particularly one who has performed well in the past, should be respected. This can be quite legitimate, but poses problems if the manager's judgement is indeed flawed.
- All of the above may contribute to a culture of "not rocking the boat" at board meetings. Because of this, the role of boards in corporate governance, and how to improve their oversight capability, has been examined carefully in recent years, and new legislation in a number of jurisdictions, and an increased focus on the topic by boards themselves, has seen changes implemented to try and improve their performance.

Sarbanes-Oxley Act

The Sarbanes-Oxley Act (SOX) has introduced new standards of accountability on the board of directors. Members now risk large fines and prison sentences in the case of accounting crimes. Internal controls are now the direct responsibility of directors. This means that the vast majority of public companies now have hired internal auditors to ensure that the company adheres to the highest standards of internal controls. Additionally, these internal auditors are required by law to report directly to the audit board. This group consists of board of directors members where more than half of the members are outside the company and one of those members outside the company is an accounting expert.

Enron Corporation

] Enron Corporation (Stock ticker: ENE) is an energy company based in Houston, Texas. Prior to its bankruptcy in late-2001, Enron employed around 21,000 people and was one of the world’s leading electricity, natural gas and communications companies with claimed revenues of $101 billion in 2000. Fortune magazine named Enron "America’s Most Innovative Company" for six consecutive years. It became most famous at the end of 2001 when it spectacularly failed, revealing it was sustained by and in large by institutionalized, systematic and well-planned accounting fraud. Its European operations filed for bankruptcy on November 30, 2001, and it sought Chapter 11 protection in the U.S. two days later, on December 2. It still exists mostly to operate what property it has left, carry out bankruptcy proceedings and repsond to legal challenges. It has since entered the common conscious as a symbol of corporate fraud and corruption.

Growth

Enron was founded in 1930 as Northern Natural Gas Company, a consortium of Northern American Power and Light Company, Lone Star Gas Company, and United Lights and Railways Corporation. The consortium ownership was gradually dissolved between 1941 and 1947 through a public stock offering. In 1979, Northern Natural Gas was restructured under the ownership of a new holding company, InterNorth Inc., which replaced Northern Natural Gas on the New York Stock Exchange. In 1985, InterNorth acquired competitor Houston Natural Gas Company in a transaction engineered by HNG CEO Kenneth Lay. Although InterNorth was the purchaser, Lay emerged as CEO and promptly renamed InterNorth as Enron Corporation, with headquarters in Houston rather than InterNorth/Northern Natural Gas's base in Omaha. Initially, the company was to be named Enteron, chosen for the positive connotations of "enter" and "on," but when it was pointed out that the term meant "intestine" — which had other connotations for a natural gas company — it was quickly shortened. Enron was originally involved in the transmission and distribution of electricity and gas throughout the United States and the development, construction, and operation of power plants, pipelines, and other infrastructure worldwide. In 1998 it moved into the water sector, creating the Azurix Corporation, which it part-floated on the NYSE in June 1999. Azurix failed to break into the water utility market, with its only major concession, in Buenos Aires Province, a large-scale money loser. In April 2001 Enron announced its intention to break up Azurix and sell its assets. Enron grew wealthy through its pioneering marketing and promotion of power and communications bandwidth commodities and related derivatives as tradable financial instruments, including exotic items such as weather derivatives. As a result, Enron was named "America's Most Innovative Company" by Fortune magazine for six consecutive years, from 1996 to 2001. It was on the Fortunes "100 Best Companies to Work for in America" list in 2000, and was legendary even among the elite workers of the financial world for the opulence of its offices. see also: Wendy Lee Gramm
Products
Enron Traded more then 800 different products online at EnronOnline some of which include the following.
- Advertising Risk Management
- Bandwidth
-
- Broadband Services
- Building Services
- Coal
-
- Credit Risk Management
-
- Crude Oil & Products
-
- Electricity / Power
- Emission Allowances
-
- Energy Outsourcing
- Energy Asset Management
- Enron Intelligent Network
- Facility Management
- Forest Products
-
- Freight
- Media Risk Management
- Metals
- (also see Steel)
- Natural Powers of Gas
-
- Lumber
-
- Oil & LNG Transportation
- Petrochemicals
-
- Plastics
-
- Power
-
- Principal Investments
- Pulp & Paper
-
- Risk Management for Commodities
- Shipping / Freight
- Steel
-
- Streaming Media
- Water & Wastewater
- Weather Risk Management
-
- Wind Energy (Items with a (
- ) were traded on EnronOnline) Its was also an extensive futures trader: sugar futures, coffee futures, hog futures, grains, and other meat futures.
EnronOnline
: In November 1999 Enron launched EnronOnline. EnronOnline was the first web-based transaction system that allowed buyers and sellers to buy, sell, and trade commodity products globally. It allowed users to do business only with Enron, which was seen as a particular weakness. Due to the giant cash needs of Enron Online and the company wasting money in other areas such as broadband, Azurix, Enron Energy Services, and shutting down the original pipeline service which generated cash flow, Enron virtually drained itself of cash. The Enron Global Finance department had to keep working up more and more creative financing moves to keep the company up and running.
Decline
Enron's global reputation was undermined, however, by persistent rumours of bribery and political pressure to secure contracts in Central and South America, in Africa, and in the Philippines. Especially controversial was its $3 billion contract with the Maharashtra State Electricity Board in India, where it is alleged that Enron officials used political connections within the Clinton and Bush administrations to exert pressure on the board. On January 9, 2002, the United States Department of Justice announced it was going to pursue a criminal investigation of Enron and Congressional hearings began on January 24. After a series of scandals involving irregular accounting procedures bordering on fraud involving Enron and its accounting firm Arthur Andersen, it stood at the verge of undergoing the largest bankruptcy in history by mid-November 2001. A white knight rescue attempt by a similar, smaller energy company, Dynegy, was not viable. During 2001, Enron shares fell from over US $90.00 to US$0.30. As Enron was considered a blue chip stock, this was an unprecedented and disastrous event in the financial world. Enron's plunge occurred after it was revealed that much of its profits and revenue were the result of deals with special purpose entities (limited partnerships which it controlled). The result of this was that many of the losses that Enron suffered were not reported in its financial statements.
Insider Trading

Beginning
Insider trading, trading of a security based on material non-public information about a company, at Enron Corporation is not just a thing of the late 1990s or early 2000s. Enron has had trouble with insider trading dating back even to the 1980s. The first documented example of insider trading at Enron occurred in 1987. Two auditors, David Woytek and John Beard, discovered bank records showing that millions of dollars had been moved from Enron into the personal accounts of Louis Borget and Thomas Mastroeni. Both Louis Borget and Thomas Mastroeni were rumored to consort with rulers of Saudi Arabia and Kuwait, gaining inside information on the workings of OPEC. This insider information had led to more profitable trading of oil commodities, until the cash flows from Enron into personal accounts were discovered by Woytek and Beard. Both auditors were told by Chief Executive Officer Kenneth Lay to continue their investigation and make sure every penny was returned to the rightful account; however, no immediate action was taken against the perpetrators. Woytek and Beard would eventually gather enough information to prove that Borget and Mastroeni were participating in insider trading and stealing from the company. This information included bank statements that showed cash flows that were not recorded in the company’s records along with copies of altered statements that Borget had filed with the company. However, despite all of the evidence that the two auditors had collected, they were told to drop the investigation by Enron’s president, Mick Seidl, and the Chief Financial Officer, Keith Kern. Unfortunately for Woytek and Beard, Borget had brought in tens of millions of dollars to the company. Enron had given both Woytek and Beard the impression that the annual profits that Borget brought in to the corporation were more important than maintaining legal practices.
The Recent Insider Trading
If the Enron traders were indeed participating in insider trading during the 1980s, they apparently would not learn their lesson from nearly being caught by David Woytek and John Beard. To the auditors, it seemed that Enron would become caught up in the race for higher profits and would pursue them even if it meant using illegal practices. Enron had created offshore entities, a unit which may be used for planning and avoidance of taxes, raising the profitability of a business. This provided ownership and management with full freedom of currency movement, and full anonymity, that would hide losses that the company was taking. These entities made Enron look more profitable than it actually was. This practice drove up the stock price to new levels at which point the executives began to work on insider information and trade millions of dollars worth of Enron stock. The Executives and insiders at Enron knew about the offshore accounts that were hiding losses for the company, however, the investors knew nothing of this. In August of 2000, Enron’s stock price hit its highest value of $90. It was at this point in time that Enron’s executives, who possessed the inside information of the hidden losses, began to sell their stock. At the same time, the general public and Enron’s investors were told to buy the stock, as the sky was the limit. Enron’s executives told the investors that the stock would continue to climb until it reached possibly into the $130 to $140 range, while secretly unloading their shares as they knew the opposite to be true. As executives were selling off their shares of stock, the price continued to drop. As the price dropped, investors were told to continue buying stock or hold steady if they already owned Enron because the stock price would rebound in the near future. Kenneth Lay’s strategy for responding to Enron’s continuing problems was in his appearance. As he did many times, Lay would issue a statement or make an appearance to calm investors and assure them that Enron was headed in the right direction. By August 15, 2001, Enron’s stock price had fallen to $42 compared to its high of $90 just a year prior. Many of the investors trusted what Lay was telling them and still believed that Enron would rule the market. The investors continued to buy or hold onto their stock and lost more money every day. As October closed, the stock had fallen to $15 per share and many investors saw this as a great opportunity to buy Enron stock because of what Kenneth Lay had been telling them in the media. Just under a month later, on November 28, the stock price would slip below one dollar as the public was finally made aware of the millions of dollars in losses that Enron had been hiding. Enron CEO Kenneth Lay has been accused of selling over $70 million worth of stock at this time, which he used to repay cash advances on line of credit. He sold another $20 million worth of stock in the open market. Also, Lay’s wife, Linda, has been accused of selling 500,000 shares of Enron stock totaling $1.2 million on November 28, 2001. The money earned off of this sale did not go to the family but rather to charitable organizations, which had already received pledges of contributions from the foundation. Records show that Mrs. Lay placed the sale order sometime between 10:00 and 10:20 AM, while the news of Enron’s problems went public about 10:30 that morning. Former Enron executive Paula Rieker has been charged with criminal insider trading. Rieker obtained the 18,380 Enron shares for $15.51 a share. She sold that stock for $49.77 a share in July 2001, a week before the public was told what she already knew about the $102 million loss.
Aftermath
Thousands of Enron employees lost their life savings after Enron collapsed. A lawsuit on the behalf of a group of Enron’s shareholders has been filed against Enron executives and directors. This lawsuit accuses twenty-nine of these executives and directors of insider trading and misleading the public. Thousands of Enron employees and investors lost their life savings, kids' college funds, and pensions when Enron collapsed. Kenneth Lay and Jeffrey Skilling, both former Enron chief executive officers, will go on trial for their part in the Enron scandal in January of 2006. Former chief accounting officer Richard Causey will be on trial along with Lay and Skilling. The 53-count, 65-page indictment covers a broad range of financial crimes, including bank fraud, making false statements to banks and auditors, securities fraud, wire fraud, money laundering, money laundering conspiracy and insider trading. U.S. District Judge Sim Lake has previously denied motions by the defendants to hold separate trials and to move the case out of Houston, where the defendants argued the negative publicity surrounding Enron's demise would make it impossible to get a fair trial. Mr. Lay pleaded not guilty to the eleven criminal charges. Lay has stated that he is innocent and that he was misled by those around him. The U.S. Securities and Exchange Commission (SEC) is seeking more than $90 million from Lay in addition to civil fines. The SEC would like to see that Mr. Lay is barred from ever serving as a director or an officer for a publicly held company. The case surrounding Mrs. Linda Lay is a difficult one. Mrs. Lay sold roughly 500,000 shares of Enron thirty minutes to ten minutes before the information that Enron was collapsing went public on November 28, 2001. This was information that Enron executives had known for over a year. This timeline of events presents a very good case for the prosecution. However, there are two specific points that make the case against Mrs. Lay a difficult one. The largest hurdle for the prosecution is that the Lay’s did not profit from the sale of this stock. It instead went to their family foundation and in the months following, the proceeds were given away to charity. The second hurdle is that even if Mr. Lay had come home and told his wife about Enron’s troubles, this communication is a marital confidence and its disclosure cannot be forced. This would mean the government would have to find a third party witness to testify that Mrs. Lay did have insider knowledge at the time of the sale. Former managing director of investor relations for Enron Paula Rieker plead guilty in federal court to a criminal insider trading charge. The one felony charge against Rieker carries a maximum penalty of ten years in prison and a $1 million fine. Rieker agreed to never again serve as an officer or director of a public company. If a federal court approves the settlement, Rieker will pay the SEC $499,333, the profit from the sale of 18,380 share of Enron stock. Rieker has been a valuable witness for the government as she prepared earnings releases and conference calls with Enron analysts.
Fallout
The long-term implications of Enron's collapse are somewhat unclear, but there is considerable political fallout both in the US and in the UK relating to the money Enron gave to political figures (around US$6 million since 1990). The fallout from the scandal quickly extended beyond Enron and all those formerly associated with it. The trial of Arthur Andersen on charges of obstruction of justice related to Enron also helped to expose its accounting fraud at WorldCom. The subsequent bankruptcy of that telecommunications firm quickly set off a wave of other accounting scandals. This wave engulfed many companies, exposing high-level corruption, accounting errors, and insider trading. Though at the time of its collapse Enron was the largest bankruptcy in history, since then it has been eclipsed by the collapse of WorldCom. Former Enron CFO, Andrew Fastow, the mastermind behind Enron's complex network of offshore partnerships and questionable accounting practices, was indicted on November 1, 2002, by a federal grand jury in Houston on 78 counts including fraud, money laundering, and conspiracy. He and his wife Lea Fastow, former assistant treasurer, accepted a plea agreement on January 14, 2004. Andrew Fastow will serve a ten-year prison sentence and forfeit US $23.8 million, while Lea Fastow will serve a five-month prison sentence and a year of supervised release, including five months of house arrest; in return, both will provide testimony against other Enron corporate officers. Ben Glisan Jr., a former Enron treasurer was the first man to be sent to prison in the Enron scandal. He pleaded guilty to one count of conspiracy to commit security and wire fraud . John Forney, a former energy trader who invented various strategies such as the "Death Star," was indicted in December 2002 on 11 counts of conspiracy and wire fraud. His trial was scheduled for October 12, 2004. His supervisors, Timothy Belden and Jeffrey Richter, both have pleaded guilty to conspiring to commit wire fraud and currently are aiding prosecutors in investigating this scandal. Jeffrey Skilling was arrested on February 11, 2004, by the FBI. Kenneth Lay was indicted by a federal grand jury on July 7, 2004 for his involvement in the scandal. He pled not guilty in court on July 9. Both men are scheduled for trial in January 2006, along with Chief Accounting Officer Richard Causey. Enron's collapse also led to the creation of the Sarbanes-Oxley Act, signed into law on July 30, 2002. It is considered the most significant change to federal securities laws since FDR's New Deal in the 1930s. The status of the pension plans that were promised to Enron's employees has been in question since the collapse of Enron. The Pension Benefit Guaranty Corporation is attempting to cover some and possibly all of the promised benefits.
Restructuring
Following the 2001 bankruptcy filing, Enron has been attempting to restructure in order to compensate as many creditors as possible. Enron's innovative core energy trading business was sold early in the bankruptcy proceedings to Merrill Lynch and Company. A last-ditch survival attempt was made in 2002 through a planned merger with arch-rival Dynegy Corporation. Dynegy backed out during merger talks, acquiring control of Enron's original, predecessor company - Northern Natural Gas - in the process. Enron is currently pursuing legal action against Dynegy over the takeover of Northern Natural Gas, which has since been sold by Dynegy to MidAmerican Energy Holdings Company. Enron's final bankruptcy plan provides for the creation of three new businesses to be spun off from Enron as independent, debt-free companies. The reorganization process commenced in 2003, with the formation of two new Enron subsidiaries, CrossCountry Energy L.L.C., and Prisma Energy International Inc. CrossCountry Energy, formed from Enron's domestic gas pipeline assets, was immediately placed on the market for creditor compensation. On September 1, 2004, Enron announced an agreement to sell CrossCountry Energy to CCE Holdings L.L.C. (a joint venture between Southern Union Company and a unit of General Electric) for $2.45 billion. The money will be used for debt repayment, and represents a substantial increase over the previous offer made by NuCoastal L.L.C. earlier in 2004. Prisma Energy International, formed out of Enron's remaining overseas assets, will emerge from bankruptcy as a main-line descendant of Enron through a stock offering to Enron creditors. Currently, many of Prisma's assets remain under direct Enron ownership with Prisma operating in a management capacity. The third company, Portland General Electric (PGE), was founded in 1889, and ranks as Oregon's largest utility. PGE was acquired by Enron during the 1990's, and will emerge from bankruptcy as an independent company through a private stock offering to Enron creditors. All remaining assets not related to CrossCountry, Prisma, or Portland General will be liquidated. As of 2005, CrossCountry is now under CCE Holdings ownership, while the Portland General and Prisma deals remain to be consummated.
Various
The baseball stadium Enron Field in Houston, Texas, named after the company, was renamed to Astros Field to avoid negative publicity. The park's name was later changed to Minute Maid Park. The Houston Astros had to pay Enron $5 million to get out of the deal. David Tonsall, a former Enron employee, became a rapper under the name N Run, which is a play on the name "Enron" and also stands for "never run." He released his CD Corporate America on December 3, 2003. "The Women of Enron" were the subject of a pictorial in the August 2002 issue of Playboy magazine. A 2005 movie, Enron: The Smartest Guys in the Room, based on the 2003 bestseller of the same name by Bethany McLean and Peter Elkind, documents the Enron story. [http://www.alternet.org/movies/21840/] [http://www.imdb.com/title/tt0413845/]
See also

- Timeline of the Enron scandal
- Pension fund losses with Enron
- California electricity crisis
- Conspiracy of Fools
- Corporate abuse
- Corporate governance
- Corporate terrorism
- Enronomics
- EnronOnline
- Azurix
- Dabhol Power Company
- List of corporate executives charged with crimes
Bibliography

- Mimi Swartz, Sherron Watkins, Power Failure: The Inside Story of the Collapse of Enron (Doubleday, 2003) ISBN 0385507879
- Bethany McLean, Peter Elkind, Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (Portfolio, 2003) ISBN 1591840082
- Robert Bryce, Pipe Dreams: Greed, Ego, and the Death of Enron (PublicAffairs, 2002) ISBN 158648138X
- Lynn Brewer, Matthew Scott Hansen, House of Cards, Confessions of An Enron Executive (Virtualbookworm.com Publishing, 2002) ISBN 1589392485 ISBN 1589392485
- Kurt Eichenwald, Conspiracy of Fools: A True Story (Broadway Books, 2005) ISBN 0767911784
- Peter C. Fusaro, .Ross M. Miller, What Went Wrong at Enron: Everyone's Guide to the Largest Bankruptcy in U.S. History (Wiley, 2002), ISBN 0471265748
- Loren Fox, Enron: The Rise and Fall. (Hoboken, N.J.: Wiley, 2003)
External links

- [http://www.enron.com The Enron homepage]
- [http://www.prismaenergy.com] - homepage of Prisma Energy International Inc.
- [http://www.crosscountryenergy.com]- homepage of CrossCountry Energy L.L.C.
- [http://www.portlandgeneral.com]- homepage of Portland General Electric Company
- [http://www.northernnaturalgas.com]- homepage of Northern Natural Gas Company
- [http://www.houstonarchitecture.info/ShowBuilding.php?ID=78 The former Enron Building from Houston Architecture Info.]
Accounting

- [http://www.nysscpa.org/cpajournal/2003/0403/features/f042403.htm CPA Journal - Enron and the Raptors]
- [http://www.riskglossary.com/link/enron.htm Enron Debacle] is an informative account of events leading up to the fall of Enron.
- [http://www.moodyskmv.com/research/UAL.html Moody's KMV Default Case Studies]
General

- [http://www.guardian.co.uk/enron/ Guardian Unlimited Special Report: Enron]
- [http://news.bbc.co.uk/1/hi/in_depth/business/2002/enron/default.stm BBC News In Depth: Enron]
- [http://www.HavenWorks.com/business/research/enron Enron News, News Sources, News Searches, and Business Research:]
- [http://www.democracynow.org/article.pl?sid=03/04/07/0254256&mode=thread&tid=29 Stunning Depths of Government Collaboration with Enron Revealed] - (Democracy Now!)
- [http://www.seen.org/pages/press_releases/enronrelease0302.shtml Enron's Pawns: How Public Institutions Bankrolled Enron's Globalization Game] - Press release of report by the Institute for Policy Studies.
- [http://cbs5.com/news/local/2004/06/16/Federal_Officials_Want_California_to_Pay_Enron.html Feds order a quarter-billion refund to Enron]
- [http://www.forbes.com/2002/01/14/0114topnews.html At Enron, ignorance was bliss]
Tapes

- [http://www.enrontapes.com/files.html The Enron Tapes] - Public/Redacted Audio Files and Public/Redacted Transcripts
- [http://www.cbsnews.com/stories/2004/06/01/eveningnews/main620626.shtml Enron traders caught on tape] - Gloating about manipulating California's energy market. (CBS Evening News)
- [http://www.cbsnews.com/stories/2004/06/02/eveningnews/main620795.shtml More Enron Tapes]
- [http://www.cbsnews.com/stories/2004/06/16/eveningnews/main623569.shtml Even More Enron tapes]
Other

- [http://biz.yahoo.com/ic/10/10521.html Yahoo! - Enron Corp. Company Profile]
- [http://www.elawforenron.com/ Document Repository for Enron Bankruptcy]
- [http://www.riskbook.com/link_topic/history_best_enron_books.htm The Best Enron Books] reviews books on Enron.
- [http://www.chron.com/content/news/photos/02/04/11/letter/popup2.htm Suicide note of Enron employee J. Clifford Baxter] (Chron.com)
- [http://www.nrunwrekords.com NRun Wreckords: 'Corporate America']
Directories

- [http://dmoz.org/Society/Issues/Business/Allegedly_Unethical_Firms/Enron/ Open Directory Project - Enron] directory category
- [http://search.looksmart.com/p/browse/us1/us317829/us317861/us65309/us282395/us10090036/us10104791/us10041501/ LookSmart - Enron Case] directory category
- [http://dir.yahoo.com/Business_and_Economy/Business_to_Business/Energy/Enron/History/ Yahoo - Enron History] directory category
- ja:エンロン

Agency cost

An agency cost is the cost incurred by an organization that are associated with problems such as divergent management-shareholder objectives and information asymmetry. The information asymmetry that exists between shareholders and the Chief Executive Officer is generally considered to be a classic example of a principal-agent problem. The agent (the manager) is working on behalf of the principal (the shareholders), who does not observe the actions of the agent. This information asymmetry causes the agency problems of moral hazard and adverse selection. These costs were first identified by Michael Jensen and William Meckling in 1976. Category:Management

19th century

:Alternative meaning: Nineteenth Century (periodical) The 19th century lasted from 1801 to 1900 in the Gregorian calendar (using the Common Era system of year numbering). Historians sometimes define a "Nineteenth Century" historical era stretching from 1815 (The Congress of Vienna) to 1914 (The outbreak of the First World War).

Europe

For Europe, the period is marked with revolution, social upheaval, and the emergence of a united conservatism from the monarchs of Europe in response to the emerging republican firestorm spreading from revolutionary France. There were many revolutions in Europe in 1848. Furthermore, the later end of the century was dominated by what many call the New Imperialism, which was the rapid aquisition of colonies worldwide by European powers, most noteworthy is the Scramble for Africa. Many countries in Europe underwent an Industrial Revolution, especially Britain and Germany, that spread elsewhere by the end of the century, with factories and railway lines built all over the continent. The start of the 19th century there was a struggle between France and Britain and their allies for control of Europe and the world during the Napoleonic Wars, with Napoleon being finally defeated at Waterloo in 1815. During the rest of the century, the British empire became the largest and most powerful empire in history, during the period known as the Pax Britannica.

Americas

In the Americas, the United States slowly grew economically, militarily, and politically, but nevertheless faced dramatic changes domestically, best seen in the Civil War, the end of slavery, and the expansion across the American continent known as Manifest Destiny. Industrially, America will explode following the Civil War, and would eventually begin expansion outward across the Pacific Ocean and in Latin America.

Other countries

For the rest of the world, there were few places not influenced by the West in some fashion, whether through colonialism, imperialism, or war. European powers gained increasing influence in China, where Qing control had weakened, and wars were fought by the western

Corporate governance

Definition

History

Parties to corporate governance

Principles

Mechanisms and controls

Internal corporate governance controls

External corporate governance controls

Systemic problems of corporate governance

Role of the accountant

Regulation

Self-regulation

Rules versus principles

Enforcement

Corporate governance models around the world

Codes and guidelines

Corporate governance and firm performance

Board composition

Remuneration

Attention to corporate governance

Foot notes

References

See also

External sources

Corporation

Legal status

Ownership and control

Formation

Naming

Unresolved issues

Origins

Etymology

Pre-modern corporations

Development of modern commercial corporations

Types of corporations

For-profit and non-profit

Closely-held and public

Multinational corporations

National features

United States

Canada

German-speaking countries

See also

Corporate taxation

Other commercial entities

Quotes

Further reading

See also

Lists

Documentary

External links

Shareholder

See also

Board of directors

Failures

Sarbanes-Oxley Act

See also

Enron Corporation

Growth

Products

EnronOnline

Decline

Insider Trading

Beginning

The Recent Insider Trading

Aftermath

Fallout

Restructuring

Various

See also

Bibliography

External links

Accounting

General

Tapes

Other

Directories

Agency cost

19th century

Europe