SERVAN, FAITH JILLIANE P.

4BSAIS-4 BUSETH-18

Assignment #1:

1. Two (2) approaches of Corporate Governance.

➢ There are two techniques in drafting a corporate governance code. These are as follows: a
rules-based approach and principles-based approach

2. Differentiate the two (2) approaches of Corporate Governance.

➢ A rules-based approach to corporate governance is based on the belief that firms must
be obliged by law or mandatory regulation to follow recognized principles of effective
corporate governance. The restrictions may only apply to certain sorts of firms, such as
big stock market corporations. However, the regulations must be followed by the firms to
whom they apply, and few (if any) exceptions are permitted.

An alternative to a rules-based approach to corporate governance is a principles-based

approach. It is founded on the belief that a single set of regulations is ineffective for
every business. Companies have different contexts and scenarios. The conditions of a
single organization might shift over time. This means that: the best corporate governance
practices for a firm may shift over time as its circumstances change and the best
corporate governance practices for a company may vary over time as its circumstances
change.

3. What happened to Enron Scandal?

➢ Enron scandal, series of events that resulted in the bankruptcy of the U.S. energy,
commodities, and services company Enron Corporation and the dissolution of Arthur
Andersen LLP, which had been one of the largest auditing and accounting companies in
the world. The collapse of Enron, which held more than $60 billion in assets, involved
one of the biggest bankruptcy filings in the history of the United States, and it generated
much debate as well as legislation designed to improve accounting standards and
practices, with long-lasting repercussions in the financial world.

Founding of Enron and its rise

Enron was founded in 1985 by Kenneth Lay in the merger of two

natural-gas-transmission companies, Houston Natural Gas Corporation and InterNorth,
Inc.; the merged company, HNG InterNorth, was renamed Enron in 1986. After the U.S.
Congress adopted a series of laws to deregulate the sale of natural gas in the early 1990s,
the company lost its exclusive right to operate its pipelines. With the help of Jeffrey
Skilling, who was initially a consultant and later became the company’s chief operating
officer, Enron transformed itself into a trader of energy derivative contracts, acting as an
intermediary between natural-gas producers and their customers. The trades allowed the
producers to mitigate the risk of energy-price fluctuations by fixing the selling price of
their products through a contract negotiated by Enron for a fee. Under Skilling’s
leadership, Enron soon dominated the market for natural-gas contracts, and the company
started to generate huge profits on its trades.

Skilling also gradually changed the culture of the company to emphasize aggressive
trading. He hired top candidates from MBA programs around the country and created an
intensely competitive environment within the company, in which the focus was
increasingly on closing as many cash-generating trades as possible in the shortest amount
of time. One of his brightest recruits was Andrew Fastow, who quickly rose through the
ranks to become Enron’s chief financial officer. Fastow oversaw the financing of the
company through investments in increasingly complex instruments, while Skilling
oversaw the building of its vast trading operation.

The bull market of the 1990s helped to fuel Enron’s ambitions and contributed to its rapid
growth. There were deals to be made everywhere, and the company was ready to create a
market for anything that anyone was willing to trade. It thus traded derivative contracts
for a wide variety of commodities—including electricity, coal, paper, and steel—and even
for the weather. An online trading division, Enron Online, was launched during the
dot-com boom, and by 2001 it was executing online trades worth about $2.5 billion a day.
Enron also invested in building a broadband telecommunications network to facilitate
high-speed trading.

Downfall and bankruptcy

As the boom years came to an end and as Enron faced increased competition in the
energy-trading business, the company’s profits shrank rapidly. Under pressure from
shareholders, company executives began to rely on dubious accounting practices,
including a technique known as “mark-to-market accounting,” to hide the troubles.
Mark-to-market accounting allowed the company to write unrealized future gains from
some trading contracts into current income statements, thus giving the illusion of higher
current profits. Furthermore, the troubled operations of the company were transferred to
so-called special purpose entities (SPEs), which are essentially limited partnerships
created with outside parties. Although many companies distributed assets to SPEs, Enron
abused the practice by using SPEs as dump sites for its troubled assets. Transferring those
assets to SPEs meant that they were kept off Enron’s books, making its losses look less
severe than they really were. Ironically, some of those SPEs were run by Fastow himself.
Throughout these years, Arthur Andersen served not only as Enron’s auditor but also as a
consultant for the company.

In February 2001 Skilling took over as Enron’s chief executive officer, while Lay stayed
on as chairman. In August, however, Skilling abruptly resigned, and Lay resumed the
CEO role. By this point Lay had received an anonymous memo from Sherron Watkins, an
Enron vice president who had become worried about the Fastow partnerships and who
warned of possible accounting scandals.

The severity of the situation began to become apparent in mid-2001 as a number of

analysts began to dig into the details of Enron’s publicly released financial statements. In
October Enron shocked investors when it announced that it was going to post a $638
million loss for the third quarter and take a $1.2 billion reduction in shareholder equity
owing in part to Fastow’s partnerships. Shortly thereafter the Securities and Exchange
Commission (SEC) began investigating the transactions between Enron and Fastow’s
SPEs. Some officials at Arthur Andersen then began shredding documents related to
Enron audits.

As the details of the accounting frauds emerged, Enron went into free fall. Fastow was
fired, and the company’s stock price plummeted from a high of $90 per share in
mid-2000 to less than $12 by the beginning of November 2001. That month Enron
attempted to avoid disaster by agreeing to be acquired by Dynegy. However, weeks later
Dynegy backed out of the deal. The news caused Enron’s stock to drop to under $1 per
share, taking with it the value of Enron employees’ 401(k) pensions, which were mainly
tied to the company stock. On December 2, 2001, Enron filed for Chapter 11 bankruptcy
protection.

Lawsuits and legislation

Many Enron executives were indicted on a variety of charges and were later sentenced to
prison. Notably, in 2006 both Skilling and Lay were convicted on various charges of
conspiracy and fraud. Skilling was initially sentenced to more than 24 years but
ultimately served only 12. Lay, who was facing more than 45 years in prison, died before
he was sentenced. In addition, Fastow pleaded guilty in 2006 and was sentenced to six
years in prison; he was released in 2011.

Arthur Andersen also came under intense scrutiny, and in March 2002 the U.S.
Department of Justice indicted the firm for obstruction of justice. Clients wanting to
assure investors that their financial statements could meet the highest accounting
standards abandoned Andersen for its competitors. They were soon followed by
Andersen employees and entire offices. In addition, thousands of employees were laid
off. On June 15, 2002, Arthur Andersen was found guilty of shredding evidence and lost
its license to engage in public accounting. Three years later, Andersen lawyers
successfully persuaded the U.S. Supreme Court to unanimously overturn the obstruction
of justice verdict on the basis of faulty jury instructions. But by then there was nothing
left of the firm beyond 200 employees managing its lawsuits.

In addition, hundreds of civil suits were filed by shareholders against both Enron and
Andersen. While a number of suits were successful, most investors did not recoup their
money, and employees received only a fraction of their 401(k)s.
 The scandal resulted in a wave of new regulations and legislation designed to increase the
accuracy of financial reporting for publicly traded companies. The most important of
those measures, the Sarbanes-Oxley Act (2002), imposed harsh penalties for destroying,
altering, or fabricating financial records. The act also prohibited auditing firms from
doing any concurrent consulting business for the same clients.

4. Differentiate the two (2) ownership models.

➢ The Anglo-American Model

This concept may be implemented in a variety of ways, including the Shareholder Model,
the Stewardship Model, and the Political Model. The Shareholder Model, on the other
hand, is the primary model. The Shareholder Model is intended to give control to the
board of directors and shareholders. Though acknowledged, stakeholders such as vendors
and workers lack control. Management is responsible for administering the firm in a way
that maximizes shareholder value. Importantly, appropriate incentives should be made
available to match management conduct with shareholder/owner interests. The model
takes into consideration the fact that shareholders supply funding to the firm and may
withdraw their support if they are unsatisfied. This can help management stay efficient
and effective. Insiders and outsiders should be represented on the board. Although the
chairman of the board and the CEO have usually been the same person, this approach
tries to have two distinct persons hold both positions. The continued communication
between the board, firm management, and shareholders is critical to the success of this
corporate governance model. Significant concerns are brought to the notice of
shareholders. Important decisions are presented to a vote among shareholders. Regulatory
agencies in the United States favor shareholders over boards of directors and senior
management.

The Continental Model

Under the Continental Model, the controlling power is represented by two groups. There
are two of them: the supervisory board and the management board. The management
board in this two-tiered arrangement is made up of corporate insiders such as executives.
Outsiders, like as stockholders and union members, make comprise the supervisory
board. Banks that own stock in a corporation may also have members on the supervisory
board. The two boards are kept entirely separate. A country's law governs the size of the
supervisory board. Shareholders cannot modify it. With this corporate governance
approach, national interests have a big effect on firms. Companies are required to align
with government goals. This approach also views stakeholder interaction to be extremely
valuable since it may assist and boost a company's ongoing operations.

The Japanese Model

Banks, linked corporations, big shareholders known as Keiretsu (who may be involved in
common enterprises or have trade contacts), management, and the government are the
essential participants in the Japanese Model of corporate governance. Individual
 shareholders with a smaller, independent stake have no influence or say. These essential
individuals work together to form and oversee corporate governance. The board of
directors is typically made up of insiders, such as corporate executives. If earnings fall,
Keiretsu may remove directors from the board. The government influences business
management operations through its legislation and policies. Corporate transparency is
less likely under this paradigm owing to the concentration of power and the focus on the
interests of people with that power.

5. What is the significance of Corporate Social Responsibility (CSR)?

➢ Corporate social responsibility enables businesses to contribute to society, the

environment, consumers, and other stakeholders. CSR illustrates that you are a company
that cares about more than simply the issues that affect your profit margins, which will
attract consumers that share your beliefs. As a result, operating sustainably makes good
commercial sense.

Public image has improved. This is critical because buyers evaluate your public image
while determining whether or not to buy from you. Something as easy as staff employees
spending one hour a week at a charity demonstrates that you are a brand that cares about
others. As a consequence, you'll look considerably more appealing to customers.

Brand awareness and recognition have increased. This information will spread if you
are devoted to ethical behaviors. As a result, more people will hear about your business,
increasing brand awareness.

Saving money. Many easy improvements, such as utilizing less packaging, will assist to
reduce your production expenses.

An edge over rivals. You distinguish yourself from competitors in your sector by
adopting CSR. You promote yourself as a firm that is willing to go the extra mile by
taking into account social and environmental considerations.

Customer involvement has increased. You should scream it from the rooftops if you
use sustainable systems. Share it on your social media accounts and make a tale out of it.
You should also present your efforts to local media outlets in the hopes that they would
cover it. Customers will take notice and interact with your brand and activities as a result.

Increased staff involvement. Similarly to consumer involvement, you must ensure that
your staff are aware of your CSR efforts. Employees prefer to work for a firm that has a
positive public image than one that does not. Furthermore, demonstrating your
commitment to issues such as human rights increases your chances of attracting and
retaining outstanding applicants.

Employee perks should be expanded. When you adopt CSR, your employees will reap
a variety of rewards. Your office will be a more cheerful and productive environment, and
by encouraging activities such as volunteering, you will stimulate personal and
professional growth.
REFERENCES:

https://www.britannica.com/event/Enron-scandal/Downfall-and-bankruptcy

https://www.investopedia.com/terms/c/corporategovernance.asp

https://www.highspeedtraining.co.uk/hub/importance-of-corporate-social-responsibility/?fb
clid=IwAR27Y2Ju_kZeU_j0AXF0CLEP6DUBpARs3UCtiPHtWAVkC0a5PR2M8udsspA