Enterprise Governance Failures

Yahoo’s Scott Thomson

In 2012, Yahoo appointed the new Chief Executive Officer (CEO) Scott Thompson to help the company’s struggling fortunes (Forbes, 2013). Within few months, shareholder activist group raised their concern on the resume of Scott Thomson which include the degree of Computer Science and Accounting whereas he only had an actual accounting degree. The deception and lack of oversight sent shocking waves to stockholders and media. Board did not fulfil their responsibility to vet the new executive officer and most importantly filing to Securities and Exchange Commission were falsified, which can lead to disciplinary actions or penalties. Scott Thomson decided to voluntarily step down from the position (Forbes, 2013).

The dilemma could have been avoided if board had done their job of vetting new aspiring executives’ thoroughly during the process of recruiting new CEO for Yahoo. The hiring of external companies to vet the educational and professional qualifications using references could have easily identified the misrepresentation in the resume during the hiring process.

Enron

In 2001, United States Securities and Exchange Commission (SEC) announced that they were investigating the accounting practices of Enron based on concerns raised by shareholders and analysts in last few years (Forbes, 2013). Investigation revealed manipulation of accounting rules, masking of huge losses and liabilities as well as several charges of money laundering, bank fraud, insider trading and conspiracy by then CEO Ken Lay, former CEO Jeffrey Skilling, CFO Andrew Fastow and several other high-ranking executives (Forbes, 2013). Accounting firm Arthur Anderson was responsible for the auditing of Enron, but firm issued favorable reports by ignoring Enron’s malpractices and received monetary benefits in exchange (Collins, 2019). SEC investigation found Arthur Anderson destroying the financial documents of Enron to avoid being caught. Court stopped the accounting firm from public accounting practices lead to closure of company followed by thousands of layoffs (Collins, 2019).

The catastrophe could have been avoided by following corporate ethical and responsibility policy, which require truthful financial reporting, transparency, and auditing practices. Executive management acted poorly and did not follow the high standards of corporate ethics lead to bankruptcy of Enron. Moreover, external accounting firm Arthur Anderson did not perform their job ethically and professionally, which also lead to closure of their firm. The issue could have been avoided if,

1. Board had fulfilled their job of corporate oversight over Enron’s fiscal health.

2. Concerns of analysts and stockholders were not ignored.

3. Whistleblowers were not retributed for raising concerns on malpractices, and issues were corrected at the initial stages.

4. External audit firm held the CFO of Enron accountable for malpractices and manipulations, instead audit firm became part of Enron’s misconduct.

Volkswagen’s diesel emissions scandal

In 2015, environmental protection agency (EPA) found out that diesel cars manufactured by Volkswagen (VW) are passing emission tests by cheating (Cultbizztech, 2018). VW had a software code which would detect if any emission testing being performed on the vehicle, resulting in reduced emission of toxic fumes during emission testing than regular road usage of vehicle. EPA found out 482000 diesel VW vehicles were emitting 40 times more toxic fumes than permitted, overall 11 million vehicles were impacted worldwide. VW admitted the cheating on emission, followed by resignation of VW’s CEO and penalty of $2.8 billion by US federal court (Cultbizztech, 2018).

Issue raised serious concerns on the professional ethics of VW executives all the way down to Engineers responsible for designing and manufacturing the vehicles. Internal processes of check and balances, engineering audits as well as external audits could have found the erroneous code early. Also, undue pressure on engineering to meet the emission standards while improving the fuel efficiency might have caused engineers to cheat the emission system. Whistleblowing could have helped catch the malpractices at the early phases.

BP

In 2000, oil giant BP spent $200m on global public relationship and marketing campaign to improve its brand image as an environmentally responsible and nature-inspired, resulting in increased brand awareness by several folds in 2007 (World Finance, 2019). However, in 2010 explosion of the Deepwater Horizon rig in the Gulf of Mexico, which killed 11 workers and severely damaged the environment due to 87 days of oil leakage tarnished the company’s image due to their initial lethargic and cold response. By 2015, BP had spent $28bn to settle claim and perform environmental clean-up (World Finance, 2019).

Eley (2010) found that BP’s decision of replacing the mud before plugging the well, which could have increased the chances of explosion especially after the failure of pressure test earlier on the same day was likely done to save $500,000 per day cost of Deepwater Horizon’s crew, and rush to start the production from the new well. The cement and mudding work on the rig was performed by Halliburton using their new chemical cement, which was expected to cure rapidly but instead new chemicals released too much heat, thawing gases and sending up the bore and riser. Lack of government regulations also lead to catastrophe instead industry is mostly self-regulated in deep sea exploration exercises (Eley, 2010).

The disaster could have been avoided if standard engineering practice of capping the well using cement was used first, instead of replacing the mud. It appears, BP was in a rush to make money instead of spending more for safer operations. Effective regulations regarding the equipment in the event of explosion could have avoided the disaster.

Sarbanes-Oxley Act

In 2002, Congress enacted Sarbanes-Oxley act due to WorldCom and Enron’s debacle (Super Pages, 2019). The act mandates certification of internal audits and setup civil and criminal penalties for security violations. Some of the highlights of the Sarbanes-Oxley act are:

1. All public companies, big or small are regulated for financial statements, accounting practices, and corporate responsibilities.

2. Act grants the external auditors more access to company data, with special provisions for compensation disclosure of upper management.

3. Act protects the whistleblowers from retribution by adding up to 10 years of prison time for the companies.

4. Act require correct financial statements to reflect company’s fiscal health and responsibility.

5. Company executives are required to sign off their financial statements for accountability under the act.

6. Act set up to 20 years of prison if corporate employees alter or hide or misfile documents to obstruct justice. Accountants can get up to 10 years in prison for intentionally throwing away documents before the five-year limit.

In summary, Sarbanes-Oxley act illustrates the significance of ethical corporate responsibilities, with stiff penalties for violations (Super Pages, 2019).

References:

Cultbizztech (2019). 7 Corporate Scandals we cannot forget. Retrieved from https://cultbizztech.com/7-corporate-scandals-we-cannot-forget/

Forbes (2013). 5 most publicized ethics violations by CEOs. Retrieved from https://www.forbes.com/sites/investopedia/2013/02/05/5-most-publicized-ethics-violations-by-ceos/#5d5233224bbc

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uper Pages (2019). Sarbanes Oxley Act Summary. Retrieved from https://www.superpages.com/em/sarbanes-oxley-act-summary/

World Finance (2019). The six biggest brand disasters of the last decade. Retrieved from https://www.worldfinance.com/special-reports/the-six-biggest-brand-disasters-of-the-last-decade

Eley, T. (2010). What caused the explosion on the Deepwater Horizon? Retrieved from https://www.wsws.org/en/articles/2010/05/spil-m14.html

Collins, D. (2019). Arthur Anderson – American Company. Retrieved from https://www.britannica.com/topic/Arthur-Andersen