• Background: Corporations were regulated by states and courts until a series of high-profile scandals.
• Deregulation in early 1990s and American corporate law contributed to scandals, corporations narrowly focus on shareholder gains
• Shareholder v Stakeholder systems: American system only considers shareholder interests. European/Japanese stakeholder system considers interests others associated with corporation
• Legislation: 2002 Sarbanes-Oxley Act

Background

• Traditionally corporate governance has been a matter of state. The State of Delaware has set the standard for most corporate law because because most of the large public companies in the U.S. are headquartered within the state. The Sarbanes-Oxley Act of 2002 was the first statute that federalization corporate law. It attempted to responded to the problems in corporate law that led to the Enron, Tyco, Worldcom, and other corporate scandals. As a common law system, corporate law in the United States is largely made though judicial decisions.

Corporate Scandals and Enron

• The deregulation legislation passed in the early 1990s by the U.S. Congress gave electricity and natural gas companies considerable freedom to operate without requiring financial disclosures. Although this legislation resulted in price volatility and eventually California's power crisis 2000-2001, strong lobbying effort kept the market largely deregulated. Through a series of events that culminated in the collapse of the Enron corporation in late 2001, it was revealed that a large portion of its profits and revenue were the result of deals with limited partnerships that it controlled. In addition, many of Enron's debts and the losses that it suffered were not reported in its financial statements in order to preserve the company's reputation as a profitable company. Enron eventually filed for bankruptcy, becoming the largest bankruptcy case in history and destroying its top tier accounting firm, Arthur Anderson.
• Enron's collapse, and the subsequent Tyco, Worldcom, and other corporate scandals initiated a debate surrounding corporate governance in the United States that focuses on the management of publicly held corporations. Specifically, who runs the company, how decisions are made, and how decision-makers are held accountable. Corporate governance in the United States mandates that managers are held accountable to only those who have a legitimate stake in the corporation. The management is overseen by a board of directors who represents the shareholder interests. All shareholders have an equal stake in the corporation. Enron's conduct was driven by the desire to generate shareholder value. Every large corporation in a shareholder system concentrates exclusively on its short-term financial performance because corporate law statutes support the directors' emphasis on shareholder interests and shareholders, who can hold stock anywhere from a single day to years, have a preoccupation with quarterly returns. In their effort to please shareholders, Enron executives misrepresented the company's performance.

Shareholder versus Stakeholder Systems

• The Enron bankruptcy resulted in the loss of thousands of jobs. Enron employees and investors lost all their savings, children's college funds, and pensions. These losses are consequences of a system in which shareholders are the only group represented in decisions made by managers, whether the decisions are ultimately good or bad for the company.
• Other countries, such as Germany and Japan, have developed a model that provides representation for broader community associated with the corporation on corporate boards. In stakeholder models, the interests of each group are balanced against each other so that no single group is overrepresented in the decision. German law sees employees as legitimate stakeholders in a corporation and gives them a legal claim to representation on boards. Japanese companies incorporate labor, banks, suppliers, and consumers into their formal decision-making processes.

Legislation

• The corporate scandal series culminated in the enactment of the 2002 Sarbanes-Oxley Act and has been followed by significant regulation by the US Securities and Exchange Commission and stock exchange rules from self-regulating bodies like the New York Stock Exchange and NASDAQ. Sarbanes-Oxley has not changed the basic structure of corporate governance in the United States but it has attempted to address accountability and accuracy standards for company's public disclosures.