Corporate governance failure is an existential business risk. Recent decades have witnessed a number of high-profile corporate failures worldwide, such examples include Enron, Worldcom, Royal Bank of Scotland, Satyam. Causes of corporate governance failure are varied, yet the consequences have a far-reaching impact. In this assessment, you should reflect on the relationship between the aspects of corporate governance we have considered in this course, and their role in corporate governance failure. You are required to discuss and evaluate ALL of the following topics relating to corporate governance failure. In your answer you should make reference to academic journal articles and relevant case studies.
Question 1
A large proportion of privately held companies have family involvement, in terms of both ownership and management. Some literature finds that family ownership helps to enhance monitoring mechanisms and consequently improves firm performance. Family firms are not motivated to pursue short-term objectives and tend to prioritize succession planning, thus implying that there is a positive relationship between family ownership and business ethical awareness (Arregle et al. 2007). However, despite the benefits of family ownership, problems may still exist. Family firms are characterized by trust among family members, and such trust can always be exploited by dishonest family members. Furthermore, trust may enable family firms to have less strict controls in place. In addition, as firms grow, there may be a need to bring in outside investors, this may result in conflicts of interest between family members and non-family shareholders. Similarly, conflicts may also arise between family members, for example, as a result of generational differences. Factors such as these, may contribute towards corporate governance failure (Sacristan-Navarro & Cabeza-Garcia, 2020)
Required: Evaluate the role of family ownership in corporate governance failure, you should make reference to Sacristan-Navarro & Cabeza-Garcia (2020) and the case of El Corte Ingles.
Question 2
The Cadbury Code was introduced in the UK in 1992. Its subsequent evolution into the UK Corporate Governance Code has seen numerous changes encompassing aspects such as board and committee roles, executive remuneration, board diversity, and risk. Despite these changes, the UK has seen several high-profile corporate governance failures such as Carrillion, British Steel, and Patisserie Valerie. Failures such as these prompt debate about the nature of the corporate governance framework in the UK and the effectiveness of the Code.
Required: Evaluate the extent to which corporate governance reforms such as the UK Corporate Governance code 2018 influence corporate governance failure. You should make reference to the paper by Elsayed et al (2022).
Question 3
The U.S. Statement on Auditing Standards (SAS) No. 82 identifies two types of corporate fraud: financial reporting fraud and misappropriation of assets. In terms of financial reporting fraud, it refers to management behavior that seeks to inflate reported profits or other assets by deliberately overstating assets and revenues or understating expenses and liabilities in financial statements (Rezaee, 2005).
Required: Explore different types of fraudulent techniques/methods that firm managers may use to manipulate the firm’s financial reporting and mislead investors.
Question 4
Internal governance mechanisms including board of directors, board sub-committees, board of supervisors play an important role in mitigating the principal–agent conflicts (Hu et al., 2010). Previous corporate board studies have paid attention to the efficacy of boards of directors in fulfilling their monitoring and advisory roles and their influence on corporate governance. For instance, Uzun et al. (2004) find that board composition and the structure of a board’s oversight committees are significantly correlated with the incidence of corporate scandals. Xiang and Zhu (2020) highlight the important role played by academic independent directors on improving financial reporting quality. In addition, CEOs and other board members of firms committing scandals often receive lower compensation (Conyon & He, 2016).
Required: Examine how different board characteristics affect the occurrence of corporate scandals. You should make reference to the paper by Uzun et al. (2004).
Question 5
An increasingly important external control mechanism affecting corporate governance worldwide has emerged with the rise of the influence of institutional investors as equity owners (Huyghebaert & Wang, 2012). However, the recent empirical findings are mixed. On one hand, Pucheta‐Martínez & García‐Meca (2014) find that institutional directors are effective as monitors of management, which leads to higher corporate financial reporting quality. On the other hand, Burns et al. (2010) find that different types of institutional investors have different impact on the occurrence of financial misreporting.
Required: Critically evaluate the role of institutional ownership in the occurrence of corporate scandals. You should at least make reference to Pucheta‐Martinez & Garcia‐Meca (2014) paper.
Question 6
Corporate social responsibility (CSR) has received increasing attention from the general public, policy makers, and academic researchers in recent decades, and the discussion on why firms engage in socially responsible activities is ongoing. Some researchers argue that CSR engagement represents a sincere managerial commitment to ethical behaviors. Subsequently, socially responsible firms are less likely to manipulate earnings (Kim et al. 2012). However, Li et al. (2021) argue that fraudulent firms strategically adjust their CSR performance to cover up their fraudulent financial activities.
Required: Critically discuss why firms especially those firms committed corporate scandals engage in CSR practices? You should at least make reference to Li et al. (2021) paper.
Question 7
Required: Reflecting of your answers above, identify the key factors which contribute to corporate governance failure.
