UNIVERSITY OF IMMACULATE CONCEPTION

Jacinto St., Davao City

MBA 215 CSR

ADRIAN L. BALASO ROLANDO G. BORJA, DBM

Student Professor

CASE #10/TITLE
Why Do CEOs Survive Corporate Storms?

BACKGROUND OF THE CASE

The paper, Why Do CEOs Survive Corporate Storms?, have been conducted to
find explanations on why majority of misreporting CEOs retain their jobs. The role of
directors both personal and reputational incentives in the CEO retention decision have
been discussed. There are two types of personal benefits which makes independent
directors less likely to remove CEOs in their position: (1.) loss avoidance on equity-
contingent wealth, (2.) increased compensation. These have resulted into collusion
because directors could sell equity at inflated prices during the misreporting period. In
addition, they would less likely remove CEOs when there is a ratified merger which
results to loss of shareholder wealth. They are discouraged also to remove CEOs when
it is costly to find replacement of CEOs. CEOs with good track record and higher
managerial ability are more likely to be retained especially if they are founder CEOs.
However, directors will more likely remove CEOs when the firm is subject to 10b-5
litigation. All of these became possible due to personal interests, and lack of monitoring
and control.

STATEMENT OF THE PROBLEM

The problem of the case is how to prevent CEOs from issuing misreporting
Financial Statements.

SWOT ANALYSIS
Strengths Weaknesses
 Increase firm’s value  Results to costly litigation
 Increase compensation for CEOs  Might result to bankruptcy if remain
and independent directors undiscovered in the long run
 Encourage to retain CEOs with  CEOs and directors took
 good standing and higher advantage with the laxity in
competence monitoring
 Gives priority to founder CEOs  Destroys firm’s reputation

Opportunities Threats
 Increase investment from potential  Government interventions for
investors misreporting the financial
 Customers would patronize the statements which result to the
firm considering they have good firm’s closure and bankruptcy
reputation in the eyes of the  Competitors who have fair financial
stakeholders statements could outweigh the firm

ALTERNATIVE ACTION
1. Strengthen both internal and external audit function
2. Cultivate an ethical culture within the firm

PROS & CONS TO ALTERNATIVE ACTION

1. Strengthen both internal and external audit function
Pros Cons
 Good reputation and high firm’s  Requires much effort and time
value  Costly
 Financial statements are more  Need to have enough
reliable resources in terms of budget
 Ensure compliance to and competent people
regulatory requirements
 Immediately identify
deficiencies and risks
 Decrease the possibility of
fraud

2. Cultivate an ethical culture within the firm

Pros Cons
 Lowers the possibility of  Subjective
misreporting  Could be possible in the short
 Conducive working environment period of time
 Boost employees satisfaction

RECOMMENDATION/S
I will recommend that firms must choose alternative 1 – Strengthen both
internal and external audit function. It is true that engaging in thorough audit requires
much time and effort. It is definitely requires much resources in terms of funds and
people. It is costly since firm must hire those knowledgeable and competent personnel
to do the internal audit. They must engage also to audit firms with expert staff to do the
external audit.
However, this approach could help the firm to stop issuing misreporting reports.
Internal audit could immediately monitor those practices which are not relevant and
compliant to firm’s policies and regulations. Moreover, external audit function will
increase the firm’s integrity and reliability because staff could assess fair presentation of
financial statements. They can evaluate if the presentation follow the standards. With
these, CEOs will be prevented from issuing misreporting financial statements. This will
increase firm’s value and far from bankruptcy.
REFERENCES:
https://papers.ssrn.com/sol3
https://www.nber.org/papers
https://corpgov.law.harvard.edu
Nshisso, Ngoie Joel (February 2010). “Enron:SWOT Analysis.” Northcetral University.
Wayn, Leslie (January 2002). Enron’s Collapse; Before Debacle, Enron Insiders
Cashed in $1.1 Billion in Shares.” Retrieved from https://www.nhtimes.com