Corporate governance reforms: fact or fiction?

Abstract

Purpose

Reforms set forth in Sarbanes‐Oxley and the NYSE, AMEX, and NASD are designed to prevent the reoccurrence of corporate collapses at companies such as Enron Corp., WorldCom Inc., and Global Crossing Ltd. The purpose of this paper is to discuss the possible impact the reforms may or may not have had in controlling the abuses uncovered in recent corporate failures.

Design/methodology/approach

This paper examines the reforms to corporate governance and the rationale behind the reforms, and examines how the actual governance structures of Enron, WorldCom, and Global Crossing during the years of their accounting scandals compared to the new requirements. It also offers a discussion as to whether the new reforms would have been helpful in preventing management's manipulation of earnings.

Findings

Global Crossing's governance structure would have satisfied a majority of the reforms. Enron's and WorldCom's governance structures would have satisfied less than half of the reforms.

Practical implications

This paper highlights the need for management and shareholders alike to focus on the substance of the reforms and not merely the form of the reforms in order to make meaningful improvements to corporate governance.

Originality/value

This paper should serve as a warning to the investing public. The reforms in and of themselves should not be relied on to prevent future corporate scandals. The reforms, however, do focus the spotlight directly on corporate boardrooms where shareholders can now insist that directors' interests be separate from those of the CEO and upper management.

Citation

Petra, S.T. (2006), "Corporate governance reforms: fact or fiction?", Corporate Governance, Vol. 6 No. 2, pp. 107-115. https://doi.org/10.1108/14720700610655123