Posts Tagged 'WorldCom'

Turning around Tyco: how corporate governance saved the day

by Shellie Karabell, for Insead, March 18, 2010.

“Shareholders are screaming. The stock price has dropped from $60 to $7 a share. The press is hitting you every day with requests for info on the turnaround of the company. The prior management is still there, wondering about their futures. The prior board is there, wondering about their futures. And you’re there, trying to bring some order to this chaos.”

That’s how Eric Pillmore describes a typical day at the office when he stepped into the corporate governance role at Tyco early in August of 2002. The company’s CEO Dennis Kozlowski and CFO Mark Swartz had been convicted in June for theft and fraud involving more than $600 million from the company in the form of unauthorised stock trades and unapproved personal loans from the firm, which were subsequently written off.

Tyco had boasted stellar performances under Kozlowski’s leadership, increasing its generation of cash to five billion dollars in 2004 from 600 million within two years – largely through acquisitions which strengthened the company’s five core businesses. Kozlowski himself had been a long-time Tyco employee, starting in 1976 as an internal auditor, working his way up to CEO.

“He (Kozlowski) did a great job of building a set of core businesses that are very healthy today and were very healthy then,” confirms Pillmore (one of Kozlowski’s acquisitions, ADT, is today the cornerstone of Tyco’s security business). “He grew up in the company … then, I believe, he thought he was part of the company and that the assets of the company were also his. There was clearly a mixing of what he thought were his personal funds and what he believed to be the company’s funds. He saw them as one.”…(continue reading

Who Blows the Whistle on Corporate Fraud?

by R. Christopher Small, for The Harvard Law School Forum at Harvard Law School, Febraury 15, 2010.

In our paper, Who Blows the Whistle on Corporate Fraud?, which is forthcoming in the Journal of Finance, we study all reported fraud cases in large U.S. companies between 1996 and 2004 to identify the most effective mechanisms for detecting corporate fraud.

The large and numerous corporate frauds that emerged in the United States at the onset of the new millennium provoked an immediate legislative response in the Sarbanes Oxley Act (SOX). This law was predicated upon the idea that the existing institutions designed to uncover fraud had failed, and their incentives as well as their monitoring should be increased. The political imperative to act quickly prevented any empirical analysis to substantiate the law’s premises. Which actors bring corporate fraud to light? What motivates them? Did reforms target the right actors and change the situation? Can detection be improved in a more cost effective way?

To answer these questions, we gather data on a comprehensive sample of alleged corporate frauds that took place in U.S. companies with more than 750 million dollars in assets between 1996 and 2004. After screening for frivolous suits, we end up with a sample of 216 cases of alleged corporate frauds, which include all of the high profile cases such as Enron, HealthSouth, and WorldCom. Through an extensive reading of each fraud’s history, we identify who is involved in the revelation of the fraud. To understand better why these fraud detectors are active, we study the sources of information detectors use and the incentives they face in bringing the fraud to light. To identify the role played by short sellers, we look for unusual levels of short positions before a fraud emerges…(continue reading)

Corporate Governance in Sad Shape

by Eric Jackson, for The Street, February 10, 2010.

A new book documenting how poor the state of corporate governance is in America — and how it was a major cause of the financial meltdown — will make you sick.

Money for Nothing, authored by former Lehman Brothers banker John Gillespie and Salon.com founder David Zweig, lays out a compelling case for how CEOs and their minions have subverted the purpose of boards to oversee management and made them their lapdogs.

The book outlines numerous solutions to fix this problem. If they weren’t so sensible, they might have a chance of being implemented.

We’ve now lived through two different stock market crashes in the last decade, and we learned each time in retrospect how poor a job boards did to protect the companies they served.

We thought we learned our lesson after Enron and Worldcom when Sarbanes-Oxley was implemented in part to improve corporate governance…(continue reading)

Incorporating Corporate Governance

by Thoughtful Randomness, February 7, 2010.

Society bestows upon businesses the right to own and use land, labour and natural resources. In return, society has the right to expect these organisations to honour existing rights, limit their activities within boundaries of justice and bring about overall development of the society.

Business ethics is that set of reasons which govern the conduct of a business. Being ethical requires acting with an awareness of how products or services of an organisation can affect the society as a whole.

Globalization of economies has brought corporates to the centre stage of social development. In the process of decision making, managers contribute to the shaping of society. Therefore it is not a choice between profits and ethics, but profits in an ethical manner. This is Corporate Governance.

Corporate governance is about promoting corporate fairness, transparency and accountability.

SEBI report defines corporate governance as “The acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company.”

Corporate governance measures include placing constraints on management power and ownership concentration, appointing non-executive directors as well as proper disclosure of financial information and ownership concentration. Many companies have established ethics committees to review strategic decisions and how they affect the society.

So why such a sudden interest in corporate governance?

Corporate governance is an old and established concept. However it gained popularity after a major corporate scandal surfaced called Enron. Several other large companies like Maxwell Corporation, WorldCom, HealthSouth and Peregrine Systems were also convicted of financial frauds…(continue reading)

Trial Lawyers Contribute, Shareholder Suits Follow

by Mark Maremont, Tom McGinty and Nathan Koppel, for The Wall Street Journal, February 3, 2010.

Two weeks ago, the fund joined with two others in a shareholder suit against drugstore chain CVS Caremark Corp., whose stock had fallen. It was the 12th time since 2006 the pension fund has gone to court after a stock it owned declined.

For 10 of the suits, including the latest, the pension fund hired a New York plaintiffs’ law firm called Labaton Sucharow LLP. That firm, in turn, has taken a keen interest in the political fortunes of Norfolk County Treasurer Joseph A. Connolly, who heads the pension fund’s board. Attorneys at the New York law firm and their relatives have made 68 separate donations, of the maximum $500 apiece, to Mr. Connolly’s campaign war chest since late 2005, public records show.

Asked why its lawyers gave to a county treasurer in a state not its own, Labaton Sucharow said its “members and their families make perfectly legal political contributions to elected officials and candidates who support shareholder rights.” Mr. Connolly didn’t respond to requests for comment.

It is legal for lawyers, like anyone else, to give campaign money to politicians. But questions arise when the politicians are local officials with influence over the selection of legal counsel for shareholder lawsuits filed by public pension funds, a role that can be lucrative…(continue reading)

Corporate Governance Reform May be the Theme for 2010, but Caution Should be the Watchword

by Frank Aquila, for Boardmember, January 2010.

In the wake of the fallout from the credit crisis we have seen a steady stream of corporate governance reform proposals.  While many proposals focus on traditional measures designed to increase shareholder influence, most focus on issues not normally viewed as requiring shareholder input or approval. Proposals such as executive compensation, social responsibility, global warming, sustainability, government influence and political contributions are now high on many agendas.

As these proposals are refined over the next few months, a few observations are timely.  First, corporate governance now appears to be nothing more than the political fulcrum used to promote and justify a relatively broad range of new restrictions and requirements on Corporate America.  Second, many of the groups now staking claim to the “corporate governance” turf are extraordinarily diverse with goals that go well beyond the creation of shareholder wealth.  Whether we agree or disagree with their proposals or subscribe to their agendas is irrelevant, it is the current environment creating pressure for further corporate governance changes.

What is corporate governance and why focus on it?  For the most part in modern capitalism there is a distinct separation of ownership and control of the business enterprise.  Corporate governance defines the balance between shareholders and managers.  The willingness of investors to purchase shares of a corporation’s stock is based not only on the performance of the business, but also on the trust in that corporation created by effective corporate governance.  While much is made of the need for shareholder democracy, increasingly the vast majority of shares voted at U.S. shareholder meetings are cast by large institutional investors rather than by the actual beneficial owners, the fund investors and pension plan beneficiaries…(continue reading)

Majority of the World’s Corporations Don’t Get Corporate Governance Right

by Corporate Compliance Insights, January 4, 2010.

New research from Lehigh University finds that the majority of the world’s corporations implemented corporate governance measures without taking into account the financial and legal systems of the country in which they operate, and in turn, negatively impacted the firm’s performance.  In fact, the authors found that over the period studied as many as 66 percent of the world’s corporations either invested too much or too little in corporate governance based on the financial and legal system in which they operate.

Anne Anderson, associate and a chaired professor in finance, and Parveen Gupta, professor and department chair in accounting at Lehigh University’s College of Business and Economics, studied 1,732 firms representing 22 countries before co-authoring this groundbreaking research study on corporate governance and firm performance.

This research, published in the January issue of The Journal of Contemporary Accounting and Economics, is the most comprehensive of its kind to explore the intersection of a country’s financial structure and its legal system-and how this intersection impacts a firm’s governance behavior and its financial performance. The research has earned international accolades for its insight into corporate governance, including the prestigious Vernon Zimmerman Best Paper Award at the 20th Asian-Pacific Conference on International Accounting Issues in Dijon, France, last year.

“We wanted to take a hard look and question the traditional thinking that if you implement good governance than you increase the value of the firm,” said Gupta.  “Indeed, we found that this was not the case overall. Rather, only when you match the level of corporate governance with the financial and legal systems at hand did an increase in performance occur.”…(continue reading)

Why American Corporate Governance Is a Bust

by Peter Cohan, for Daily Finance, December 28, 2009.

One of the many problems that defenders of America’s free market system fail to address is the severe dysfunction at the top of the nation’s big public companies. Cases in point include some of the biggest bankruptcies of the last decade: Lehman Brothers, General Motors, WorldCom, Enron and many more. And at the core of the problems that led to these bankruptcies is a failure of directors to act on behalf of shareholders — at least in part because they have more of an incentive to work for the CEO than for public shareholders.

I was reminded of this again as I read a report in The New York Times on directors who glide from serving on the boards of failed enterprises to those of surviving ones. One example of such a director is Thomas P. Gerrity, who used to be my boss — he was president and co-founder of a technology consulting firm I worked for while studying at MIT. After selling that firm, Gerrity became dean of The Wharton School at the University of Pennsylvania, and currently serves as a professor there…(continue reading)

How to build Investor Confidence through Good Corporate Governance

by Capital Business Management, December 14, 2009.

Corporate Governance, once relegated as a nice to have, has never been higher on the agenda of companies than it is now. New regulations have been drafted, originating in the U.S., to try to restore investor confidence that has been eroded not only by the volatility of the stock market, but by a chain of governance failures such as Enron, WorldCom, Martha Stewart, etc.

The Sarbanes-Oxley Act (the Act) the name of the two U.S. Senators who proposed the bill, is designed to restore investor confidence by implementing mandatory measures centered around strong Corporate Governance.

The most important result of the Administration Act is to personally and criminally liable for breaches of the law, including the inaccuracy of the information in the financial statements (known as Section 404), and the roles and responsibilities of companies Board of Directors…(continue reading)

An Action Plan for Economic Recovery

by Roger Thompson, for the Alumni Bulletin, at Harvard Business School, December 2009.

Most books about the nation’s financial crisis tell us what happened. In his new book, HBS senior lecturer Robert Pozen tells us how to fix the system. A financial industry veteran and chairman of MFS Investment Management, a Boston firm that oversees more than $170 billion in pension and mutual funds, Pozen writes with authority and unusual clarity about complex issues in Too Big to Save? How to Fix the U.S. Financial System (Wiley).

How does the government figure out which financial institutions are too big to fail?

There are two valid reasons for bailing out a financial institution. First is to protect the system for processing payments, like checks, because that system is critical to the operation of the U.S. economy. Second is to avoid a situation where the failure of one large, interconnected financial institution is likely to lead to the failure of many other large institutions…(continue reading)


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(in Portuguese) A weekly chronicle about shareholders' rights & duties, activism and capital markets regulation, by Renato Chaves.
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