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A Guide to the Big Ideas and Debates in Corporate Governance

• Lynn S. Paine
• Suraj Srinivasan

The questions that boards, managers, and shareholders should be asking.

How corporations govern themselves has become a matter of broad public interest in recent decades. Amid this many commentators and experts still disagree on such basic matters as the purpose of the corporation, the role of corporate boards of directors, the rights of shareholders, and the proper way to measure corporate performance. The issue of how shareholder interests should be considered in corporate decision making is particularly contentious. This article is a resource for understanding today’s key debates around governance and identifying the main areas in which changes are being called for. Many readers are grappling with these questions now or may have to address in the near future; in any case, the debates are sure to affect how business operates across the globe.

Corporate governance has become a topic of broad public interest as the power of institutional investors has increased and the impact of corporations on society has grown. Yet ideas about how corporations should be governed vary widely. People disagree, for example, on such basic matters as the purpose of the corporation, the role of corporate boards of directors, the rights of shareholders, and the proper way to measure corporate performance. The issue of whose interests should be considered in corporate decision making is particularly contentious, with some authorities giving primacy to shareholders’ interest in maximizing their financial returns and others arguing that shareholders’ other interests — in corporate strategy, executive compensation, and environmental policies, for example — and the interests of other parties must be respected as well.

• Lynn S. Paine is a Baker Foundation Professor and the John G. McLean Professor of Business Administration, Emerita, at Harvard Business School.
• Suraj Srinivasan is the Philip J. Stomberg Professor of Business Administration at Harvard Business School and Chair of the Digital Value Lab at Harvard’s Digital, Data and Design Institute.

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CGRI Case Studies

Case studies by Stanford GSB faculty that illustrate concepts and lessons in corporate governance.

Keller Williams Realty (B)

This case is a follow up to HR-29A, and explains the actions taken by Keller Williams in response to the residential real estate market downturn in 2008 and 2009. The case explains the programs and initiatives put in place by the company to boost agent…

Baker Hughes, Foreign Corrupt Practices Act

In 2002, Baker Hughes was accused of violating the Foreign Corrupt Practices Act (FCPA). This case describes the actions taken by the company in response to those accusations. These include hiring a third-party law firm to undertake an independent…

Equity on Demand, the Netflix Approach to Compensation

Netflix was among a small group of Silicon Valley companies to emerge from the technology bubble of the late 1990s a clear winner in terms of growth, market share, and profitability. That Netflix was able not only to prevail over this competition but also…

Multimillionaire Matchmaker, An Inside Look At CEO Succession Planning

This case takes an inside look at CEO succession planning at Energy Corp. The case provides an overview of various models of succession planning, including external search, COO appointment, a horse race, and the inside-outside model. The case then…

Sharks in the Water, Battling an Activist Investor for Corporate Control (A)

In July 2006, Barracuda became the largest investor in Tarco International. In a meeting with management, Barracuda’s managing director advised that strong measures needed to be taken to improve operating performance. If management failed, Barracuda would…

Sharks in the Water, Battling an Activist Investor for Corporate Control (B)

This case is a follow up to CG-20A, and explains the actions taken by Tarco in response to threat from activist investor Barracuda. The case explains how the company relied on an analysis of its shareholder base and predictive proxy voting to inform its…

Royal Dutch/Shell, A Shell Game with Oil Reserves - Governance Overhaul After Scandal (B)

Following the revelation that the Royal Dutch/Shell Group of Companies had overstated its proved oil reserves by over 4 billion barrels, company officials announced dramatic changes to the company’s organizational structure and governance system. These…

Royal Dutch/Shell, A Shell Game with Oil Reserves (A)

In January 2004, the Royal Dutch/Shell Group of Companies announced that it would reduce its estimate of proved oil reserves by nearly 4 billion barrels, or 20 percent. The announcement set off a series of events, including a drop in the company’s share…

Attention Shoppers, Executive Compensation at Kroger, Safeway, Costco and Whole Foods

Retail grocery sales represent a significant portion of the U.S. economy. The industry was highly competitive, with companies operating on low gross and net margins. As a result, grocery stores were generally under significant pressure to reduce their…

Financial Restatements: Methods Companies Use to Distort Financial Performance

Over the last 10 years, the number of publicly traded companies that have had to restate financial results has risen dramatically. Regardless of whether the restatements stemmed from the aggressive application of accounting standards or the need to…

Models of Corporate Governance. Who's the Fairest of Them All?

In 2007, corporate governance became a well-discussed topic in the business press. Newspapers produced detailed accounts of corporate fraud, accounting scandals, excessive compensation, and other perceived organizational failures—many of which culminated…

10b5-1 Plans, Mortgaging a Defense Against Insider Trading

In 2006, David Zucker, chief executive officer of Midway Games, came under fire for selling a significant amount of Midway stock just weeks before a precipitous decline in the company’s share price. One year later, Angelo Mozilo, chairman and chief…

AMB Property Corporation, Financial Reporting in the REIT Industry

AMB Property Corporation set out to be a leader in corporate governance and financial reporting. The company, a publicly traded real estate investment trust (REIT) that acquires, develops, and owns industrial properties, believed that its governance and…

AOL Time Warner (A): Accounting for Goodwill

This case asks students to review the impact of SFAS 142, Goodwill and Other Intangible Assets, in the context of the AOL Time Warner merger. Under SFAS 142, companies were required to perform periodic testing to determine whether economic goodwill had…

AOL Time Warner (B): Recognition of Goodwill Impairment

This case reviews the recognition of goodwill impairment taken by AOL Time Warner following the adoption of SFAS 142, Goodwill and Other Intangible Assets. This case is the successor of A-196A, AOL Time Warner (A): Accounting for Goodwill.

Corporate Governance Ratings, Got the grade… What was the test?

In 2007, there were three prominent corporate governance ratings firms—The Corporate Library (TCL), Governance Metrics International (GMI), and Institutional Shareholder Services (ISS). These firms assessed the effectiveness and deficiency of the…

Earnings Conference Calls, Hewlett-Packard Company

The case study asks students to evaluate the role that the quarterly conference call plays in a company’s overall communications strategy with investors. In particular, students are asked to assess what additional information they can learn from the…

Executive Compensation at Nabors Industries, Too Much, Too Little, or Just Right?

Eugene Isenberg, CEO of Nabors Industries, was listed in a 2006 Wall Street Journal article as one of the highest paid executives in the U.S. over the previous 14 years. He received this compensation as a result of a unique bonus arrangement and large…

Halliburton Company, Accounting for Cost Overruns and Recoveries

In July 2002, a legal watchdog group, Judicial Watch, announced that it was suing Halliburton Company for overstating revenues during the period 1998 to 2001. The group’s contention was that Halliburton used fraudulent accounting practices to boost…

Keller Williams Realty (A)

The case describes the economic and cultural models that have led to the success of Keller Williams Realty. By 2006 Keller Williams was one of the most profitable real estate companies in the United States (if not the most profitable); in addition it was…

Shareholder Democracy, Does Gretchen Get It Right?

By 2007, Gretchen Morgenson, assistant editor and columnist at The New York Times, had gained significant attention from business leaders, regulators, and academics for her coverage of a wide range of financial and governance issues. Morgenson wrote the…

Sovereign Bancorp and Relational Investors, The Role of the Activist Hedge Fund

The coca-cola company: accounting for investments in bottlers.

In 2001, accounting regulators, especially those in the U.S., began to reconsider the rules of consolidation with a move toward a requirement based on “control,” with much less consideration of the size of the equity stake. The fundamental accounting and…

The Walt Disney Company: Investor Communications Strategy

As the chief financial officer of The Walt Disney Company, Tom Staggs was responsible not only for the financial management of the company, but also for the communication of the company’s financial and strategic objectives to its investor base. Because of…

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The most common reasons for corporate governance failure: A deep dive

Let us unravel the complexities of corporate governance failure, understanding its most common causes and offering ways to prevent it from destabilising your organisation

Corporate governance forms the backbone of any organisation. It plays an instrumental role in defining the company’s growth trajectory, ensuring ethical practices, and establishing an equitable and inclusive environment. However, instances of failure are not uncommon.

These incidents often lead to significant setbacks, tarnishing an organisation’s reputation, and in the worst cases, leading to financial ruin.

According to the Global Corporate Governance Failures report, 2022 by Ernst & Young, a significant number of organisations have experienced governance failures in the past decade, underscoring the need for CFOs and senior financial officials to take a proactive role in mitigating such risks.

Primary reasons behind corporate governance failure

One of the key reasons for governance failure is a lack of proper oversight and accountability mechanisms. A study conducted by PwC in 2022 highlighted that companies without clearly defined oversight protocols were more likely to experience governance failure.

The example of Enron, where unchecked financial misreporting led to a spectacular collapse, still looms large in corporate memory.

When executives’ personal interests supersede those of the organisation, it also opens the door for questionable decision-making and potentially, corporate failure.

Cases like Theranos, where the misleading representation of technology and disregard for investor interests resulted in legal repercussions and bankruptcy, serve as a stark reminder of the consequences of this conflict.

ISimilarly, inadequate risk assessment strategies can lead to governance failures. A recent study by Deloitte showed that companies with ineffective risk management strategies were 4.7 times more likely to face a  crisis. The global financial crisis of 2008 offers a prime example where poor risk management led to widespread governance failures.

Strategies to prevent corporate governance failure

• Enhance board accountability : CFOs can work to improve governance by ensuring greater board accountability. Transparent, regular reporting and clearly defined roles and responsibilities can significantly reduce the chance of failure.
• Mitigate conflicts of interest: Establishing stringent conflict of interest policies and fostering a culture of integrity and transparency can deter the possibility of governance failure. Frequent auditing and cultivating open communication channels can help identify and rectify potential conflicts before they become catastrophic.
• Implement robust risk management strategies: The CFOs should ensure the development and implementation of robust risk management strategies. Employing stress tests and scenario planning can help identify potential areas of vulnerability and formulate action plans to counter them.

Final Takeaway

It is crucial for CFOs to remember that corporate governance isn’t merely about ticking off compliance boxes. It is about setting a tone at the top that prioritises integrity, accountability, and foresight.

As leaders, it is essential to be cognizant of these common pitfalls and take preventive measures to avoid them. The survival and prosperity of any organisation hinge upon the quality of its governance.

Therefore, understanding the common reasons for failure and acting pre-emptively to combat them is a task of paramount importance.

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Enron Case study

This Enron case study presents our own analysis of the spectacular rise and fall of Enron. It is the first in a new series assessing organisations against ACG’s Golden Rules of corporate governance and applying our proprietary rating tool.

As we say in our business ethics examples homepage introducing this series, the first and most critical rule is an ethical approach, and this should permeate an organisation from top to bottom. We shall therefore always start with an assessment of the ethical approach of the organisation. The way this creates the culture determines the performance in relation to the other four Rules.

The Enron case study: history, ethics and governance failures

Introduction: why enron.

Why pick Enron? The answer is that Enron is a well-documented story and we can apply our approach with the great benefit of hindsight to show how the end result could have been predicted. It is also a good example to illustrate how ethics drives culture which in turn pushes the ethical boundaries and is a key influence on all the four other key elements of good corporate governance.

Hence, in advance of using our own membership for the survey input we can apply the very detailed findings from the post crash dissection of Enron. Readers who are interested can go to  Wikipedia  and burrow into the history of Enron and its major players. They can also study the various accounts that have been written and which are referred to in Wikipedia. We particularly commend “ The Smartest Guys in the Room ”, the story of Enron’s rise and fall, by Bethany McLean and Peter Elkind, and we gratefully acknowledge the valuable insights we have drawn from this fascinating book in producing our Enron case study.

Below is a brief résumé of Enron’s spectacular rise in fifteen years to a market valuation of nearly $100bn and its precipitous collapse. We have prepared a detailed history (around 20,000 words) with our own annotations, which will soon be available as an ebook for those who would like to draw their own conclusions. We have also applied our proprietary survey tool to Enron and imagined how the various stakeholder groups might have responded to a business ethics survey at a critical time in Enron’s history, mid 2000, eighteen months before it suddenly collapsed. The results of this survey are summarised below.

History of Enron

Enron was created in 1986 by Ken Lay to capitalise on the opportunity he saw arising out of the deregulation of the natural gas industry in the USA. What started as a pipelines company was transformed by the vision of a McKinsey consultant, Jeff Skilling, who had the idea of applying models used in the financial services industry to the deregulated gas industry.

He persuaded Enron to set up a Gas Bank through which buyers and sellers of natural gas could transact with each other using an intermediary (Enron) whose contractual arrangements would provide both parties with reliability and predictability regarding pricing and delivery. Enron duly recruited him to run this business and he rapidly built up a major gas trading operation through the early nineties.

During this time Enron was extending its pipeline operations into a wider power supply business, initially in the USA and then on an international scale, completing a large plant at Teesside in the UK and contracting to build a huge plant near Mumbai in India. In due course it had deals all round the globe, from South America to China. The hard driving expansion of Enron’s power business worldwide created a global reputation for Enron.

San Francisco, California. The US West Coast was an early target for its aggressive and misguided expansion.

Skilling’s vision was to transform Enron into a giant, asset-light operation, trading power generally and his next target was trading electricity. Lay was lobbying Washington hard to deregulate electricity supply and in anticipation he and Skilling took Enron into California, buying a power plant on the west coast.

Enron’s national reputation rested on the rapid expansion of its domestic business and its steadily growing revenue and earnings from trading. So on the back of his track record, Skilling was appointed Chief Operating Officer by Ken Lay and he then embarked upon transforming the whole of Enron to reflect his vision.

Observing the dotcom boom, Skilling decided Enron could create a business based on a broadband network which could supply and trade bandwidth and he set out to build this at a great pace.

However, the experiment in deregulation in California didn’t work well and in due course was reversed with recriminations all round. Moreover, the international business expansion wasn’t underpinned by adequate administration and many of the contracts later turned bad.

So Enron then took the decision to build on its international presence by becoming a global leader in the water industry and bought a big water company in the UK, following it up with a big deal in Argentina.

At this point, around 2000, Enron’s reputation was still riding high and Lay and Skilling were looked up to as visionary thinkers and top business leaders.

However, as we see elsewhere in this case study, the rapid expansion had run well ahead of Enron’s ability to fund it, and to address the problem, it had secretly created a complex web of off-balance sheet financing vehicles. These, unwisely, were ultimately secured, and hence dependent, on Enron’s rapidly rising share price.

Also, its hard driving culture was underpinned by incentive schemes which promised, and delivered, huge rewards in compensation packages to outstanding performers. The result was that, to achieve results, aggressive accounting policies were introduced from an early stage. In particular, the use of mark to market valuation on contracts produced artificially large earnings, disguising for some years underlying poor profitability in major parts of the business.

This, of course, meant that Enron was not generating adequate cashflow, while spending extravagantly on expansion, and eventually it blew up suddenly and dramatically. Colleagues of this author who met Lay and had dealings with Enron confirm that there was scepticism in the market about Enron’s profitability and its cash position. Suspicions grew that Enron’s earnings had been manipulated and in late summer 2001 it emerged that its Chief Finance Officer had privately made himself rich at Enron’s expense through the off-balance sheet vehicles. About this time the dotcom boom ended suddenly and for Enron, this coincided with the international power business going radically wrong, the broadband business having to be shut down, the water business collapsing and the electricity services business getting into serious trouble in California. Enron’s share price started to slide and Skilling, appointed Chief Executive Officer in January 2001, resigned in August.

Enron’s share price then rapidly declined, triggering repayment clauses in the financing vehicles which Enron couldn’t handle. Its credit rating went to junk status, which caused the share price to collapse and triggered further crystallising of debt obligations. Banks refused further finance, suppliers refused to supply and customers stopped buying.

At the beginning of December 2001, Enron filed for the biggest bankruptcy the USA had yet seen.

This, in turn, took down one of the largest accounting firms in the world, Arthur Andersen, which was deemed to have so compromised its professional standards in its dealings with its client Enron that it was in many ways complicit in Enron’s criminal behaviour.

The second half of this Enron case study assesses business ethics and the impact on corporate governance, as measured against our Five Golden Rules.

Ethical assessment

Enron didn’t start out as an unethical business. As we have seen in this case study, what introduced the virus was the pursuit of personal wealth via very rapid growth. This led to the introduction of quite extreme incentive schemes to attract and motivate very bright and driven people, which, in turn, led to an unhealthy focus on short term earnings.

The next step was, naturally, to look at how earnings could be massaged to achieve the aggressive revenue and earnings targets. Since the massaged figures for growth in earnings still left a shortfall in cash, Enron quickly maxed out on its borrowing abilities.

But issuing more equity would have hurt the share price, on which most of the incentives were based. So schemes had to be created to produce funding secretly and this funding had to be hidden. In this way, an amoral and unethical culture developed in Enron in which customers, suppliers and even colleagues were misled and exploited to achieve targets. And the top management, who were rewarding themselves with these same incentive schemes, boasted that a pure, market-driven ethos was propelling Enron to greatness and deluded themselves that this equated to ethical behaviour. Lay even lectured the California authorities, whom Enron was cheating, that Enron was a model of business ethics.

Finally, the respected Arthur Andersen allowed greed for fees to over-rule the strong business ethics tradition of its founder and caused it to succumb to bending and suspending its professional standards, with fatal results.

Impact on Corporate Governance

Our five Rules of Good Corporate Governance start with the need for an ethical culture. Having established that Enron’s culture became progressively more deficient in this regard, let’s consider briefly the impact of this failure in business ethics on the other Rules.

Clear goal shared by all key stakeholders

Lay and, particularly Skilling, engendered in all the staff of Enron the goal of driving up the share price to the virtual exclusion of all else. The goal of achieving a long term satisfaction from a stable customer base took a distant second place to signing up deals. In California, the customers were deliberately exploited by the traders to the maximum extent their ingenuity could achieve. Even internally, the Chief Finance Officer’s funding scheme was designed to make him rich at his employer’s expense.

Strategic management

As a McKinsey consultant specialising in strategy, Skilling had a very clear vision, at least initially, of what he wanted Enron to achieve. However, he wasn’t interested in management per se and allowed operational management to wither. But his vision of a huge trading enterprise wasn’t carried down to the next level of developing and implementing practical business plans, as evidenced by his crazy launch into broadband, a field in which he had no personal knowledge or experience and in which Enron had almost no capability or likelihood of raising the funds required to implement the project

Organisation resourced to deliver

Skilling became COO on the departure of a very tough and experienced predecessor. Even at that point, Enron had been expanding at a rate which outran its ability to set up appropriate and adequate administrative systems and controls. Added to which it had always been short of funds. Skilling’s lack of interest in operational management meant that on his appointment at COO, he made a poor situation much worse by making bad managerial appointments. His focus on rapid growth incentivised by very generous compensation schemes, and with inadequate spending controls, created a totally dysfunctional organisation.

Transparency and accountability

From the early stages, Enron’s focus on earnings and share price growth and the related financial incentives led to a necessary lack of transparency as the figures were fiddled.. One could argue that Enron felt very much accountable to their shareholders for delivering consistent above average growth in Enron’s market capitalisation. However, this growth was achieved by subterfuge and deception. Certainly the dealings in California were as far from transparent as it was possible to be.

Finally, we bring a unique perspective to this Enron case study by using our proprietary survey tool, the ACGi, to rate the company, as at June 2000, and drawing conclusions from the results.

Conclusion and rating by our Survey tool

The flaws in Enron should have been spotted from early on, and indeed were periodically commented on by various observers from the early nineties onward. If independent ethical and corporate governance surveys had been conducted by independent parties they would have highlighted the growing problems. To illustrate, consider the hypothetical survey summarised in the following chart.

The scores out of ten (high is good) result from a set of questions which aim at deriving an independent, unbiased view from the interviewees, based on observations of corporate behaviour. What we have called the “sniff test” represents the personal view of the interviewee and would take into account their gut feel about the corporation and its management and owners. The highlighted scores would point the observer to clear problem areas.

Click image to enlarge

One would conclude from this survey in June 2000 that:

• neither customers, suppliers, financiers nor local communities rated Enron’s morality in terms of business ethics
• customers and local communities thought they were breaking regulations
• customers and suppliers thought they were probably bending their own rules
• customers, shareholders, suppliers, financiers and local communities thought they were not truly honest.

It is clear with the benefit of hindsight that what started out as an imaginative and ground-breaking idea, which transformed the natural gas supply industry, rapidly evolved into a megalomaniac vision of creating a world-leading company. Intellectual self confidence mutated into contempt for traditional business models and created an environment in which top management became divorced from reality. The obsessive focus on driving the share price obscured the lack of basic controls and benchmarks and the progressive dishonesty in generating revenue and earnings figures in order to deceive the stock market led to the management deceiving themselves about the true situation.

Right up to nearly the end, Enron complied with all its regulatory requirements. The failings in these regulations led directly to Sarbanes-Oxley. But all the extra reporting in SarBox didn’t prevent the global financial meltdown in 2008 as the banks gamed the regulatory system. Now we have Dodd-Frank. What we actually need is independent Corporate Governance surveys.

If you found this summary useful, you may be interested in our full ebook :

• 52 pages of detailed analysis of the  Enron scandal
• An annotated walk-through of the history and ethics of the company
• Detailed explanations of the governance failures leading to the scandal
• Guidance for students of corporate governance
• Annexe with lessons for setting up stakeholder research 

You will also get a FREE version of our rating tool to adjust the scores according to your own assessment of the information presented in the full Enron Case Study.

If you have any comments or experience of Enron, please leave a contribution using the comments feature at the bottom of this page.

To stay up-to-date with news from Applied Corporate Governance, subscribe to our RSS feed or our mailing list .

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Case Study: WorldCom's Corporate Governance Failure

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The importance of corporate governance in today?s modern and aggressive business environment cannot be denied.The main motive of corporate governance is to enhance effective, entrepreneurial and efficient management that can deliver the long-term success of the company.Many multinational companies are following corporate governance.In the current scenario corporate governance is a hot topic , it is a relatively new field of study. Achieving best practices has been hindered by a patchwork system of regulation, a mix of public and private policy makers.and the lack of an accepted metric for determining what constitutes successful corporate governance. policy.Following the great financial scandal in big companies, like Enron,Satyam, World Com, Adelphi, Cisco and ?, one of the most topics raised by researchers and from investors is Corporate Governance.It clearly convey the necessity for company management control, division of economical unit from its ownership and enhancing the performance of the board of managers, auditors, accounting system, internal control, and finally maintaining investors and stakeholders\' rights. Using efficient managers in companies results in growth of their performance, leading to stockholders rights too; consequently financial performance will be increased and company control will be better performed.Corporate Governance importance in the world is at some extent that Standard & Poors institute has introduced following multiple criteria to measure corporate governance status: ownership structure, financial stockholders relationships, structure and how-to-act of the board of managers, and clearance and disclosure of the information. Due to the topic importance, this article will reflects the corporate governance and its conceptual framework, types of existed theories, types of the corporate governance, and comparing them with each others as well as attempting to develop corporate governance. studies applied guided bone regeneration while three studies did not.

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Biggest Corporate Governance Failures in India

Many small businesses in india have been hit hard by the global pandemic. msmes are unsure if they can survive the multiple crises that keep on coming. covid-19 has brought with it an increased risk of corruption not only in the public health sector but also in the private sector. corporate governance failures have resulted in flashy business tycoons vijay mallya and lalit modi absconding from india and the arrest of corporate heavyweights like rana kapoor, chanda kochhar and the singh brothers., recovering to a business environment of fairness and integrity won’t be possible without standing #unitedagainstcorruption. the holy grail of corporate governance is not infallible. investors have found this out the hard way when massive corporations like jet airways, dhfl, yes bank, il&fs, kingfisher airlines collapsed. gst and the insolvency law have been blamed, yet failure to comply with corporate governance rules and not sticking to legislation cannot be ruled out as the reasons., corrupt business practices, corporate takeovers and mergers call for capital restructuring, which is a prime time for corruption. if there is no independent director on the board, there is a chance that members might not comply strictly with the laws. the company’s takeover could be driven by a board member having vested interests in the acquisition. rather than maximising value for the shareholders, such a move would defeat the purpose of the whole exercise and that person in question would pocket the gains., some companies have been known to meddle with the account books, showing book profits that haven’t yet translated into cash. this is misleading for auditors and other parties looking at the account books of the organisation., corporate governance failures in india, here’s a look at how corrupt business practices led to some of the biggest corporate governance failures in india., tata-mistry fallout, cyrus mistry was a director of tata sons ltd. since 2006. the majority of shareholding was held by trusts of the tata family. this was to ensure that the control remains with the family even when cyrus mistry joined. the board frequently disagreed with the decisions of mistry and ousted him during one such meeting. mistry alleged that there was dominant control by the nominee directors of the trust, including ratan tata, who were the “shadow directors” of tata sons ltd., mistry said that he was never provided with a free hand by the promoters to manage the company and that the promoters were stubborn regarding their own projects. he also alleged that there was no independence in the working of the independent directors. nusli wadia, who was an independent director was also fired for standing up for cyrus mistry to maintain his chairmanship in group companies. this shows the clear abuse of power by the promoters., icici bank-videocon bribery case, the enforcement directorate had apprehended deepak kochhar in september 2020 after it filed a criminal case for money laundering basis an fir registered by the central bureau of investigation (cbi) against the kochhars, videocon’s dhoot, and others., the federal probe agency alleged that rs. 64 crore out of a loan amount of rs. 300 crore sanctioned by a panel of icici bank headed by chanda kochhar (wife of deepak kochhar) to videocon international electronics limited was wired to nupower renewables pvt ltd (nrpl) by videocon industries on september 8, 2009. the money was transferred a day after the disbursement of the loan. nrpl, earlier known as nupower renewables limited (nrl), is owned by deepak kochhar., pnb-nirav modi scam, the punjab national bank (pnb), one of the country’s largest public-sector lenders, found itself in the middle of a rs. 11,400 crore transaction fraud case in february 2018. the bank had detected and informed the bombay stock exchange about some “fraudulent and unauthorised transactions” in one of its branches in mumbai to the tune of $1771.69 million (approx). the cbi then received two complaints from pnb against billionaire diamantaire nirav modi and a jewellery company alleging fraudulent transactions worth about rs. 11,400 crore. this was in addition to the rs. 280 crore fraud case that nirav modi was already under investigation for, again filed by pnb. modi is facing two sets of criminal proceedings. the central bureau of investigation case relates to the large-scale fraud upon pnb through the fraudulent obtaining of “letters of understanding”, while the enforcement directorate is investigating the laundering of the proceeds of that fraud., the satyam scandal, satyam was a public-listed company and ironically enjoying a good reputation, even winning the golden peacock global award for corporate governance at one point. however, the company colluded with auditors in fraudulent accounting practices to mislead the investors, regulators, board and other stakeholders. the scandal was unravelled when the company’s chairman ramalinga raju confessed about the misrepresentation in the accounting practices and thereafter regulators like sebi stepped in and started taking action., the issue started with satyam’s attempt to invest rs. 7,000 crores in maytas properties and maytas infrastructure. these firms were owned by the family members of raju. the investments were cleared by the board on 16th december 2008 but were opposed by the investors. the accounts of the firm were manipulated by assets like cash and bank deposits being overstated, debts being understated. as a result, the investors filed various lawsuits against satyam., following the maytas deal and subsequent lawsuits, the decision of satyam board was reversed. the world bank banned satyam for 8 years to conduct any kind of business while four independent directors resigned., the satyam case sparked a reaction from various corners of corporate india, calling for urgent change in policy measures. several agencies like cii (confederation of indian industries), national association of software and services committee, sebi committee on disclosure and accounting standards etc. started looking into the policy changes regarding the audit committee, shareholder rights, whistle-blower policy etc. these committees prepared various kinds of suggestions which were later dealt with by the legislature., malvinder and shivinder singh, the now infamous singh brothers shivinder and malvinder, who were under the scanner of the economic offence wing (eow) of the delhi police for a fraudulent loan from laxmi vilas bank, are accused of siphoning nearly $2 billion from their corporate empire that spanned across listed companies including pharma major ranbaxy, hospital chain fortis healthcare and financial services company religare enterprises ltd (rel)., malvinder and shivinder have been accused of diverting the money of religare finvest limited (rfl), an rel subsidiary. the broad allegations are that malvinder and shivinder, along with other officials of rel, took loans in the name of rfl and diverted the money to other companies. this caused the company losses of rs. 2,387 crore these allegations against malvinder and shivinder singh are just the tip of the iceberg. according to a business today report from 2018, the brothers inexplicably managed to squander a whopping rs. 22,500 crore over just one decade., in a complaint malvinder accused his younger brother, shivinder, the dhillon family and sunil godhwani (former head of rel) of criminal conspiracy, cheating and fraud for allegedly siphoning off thousands of crores from rhc holdings, the group’s holding company that once promoted fortis hospitals and religare. meanwhile, sebi has accused the singh brothers of diverting rs. 403 crores from fortis healthcare to rhc., dewan housing finance limited (dhfl), the dhfl scandal was the biggest corporate fraud of 2019, and is still under investigation. it is a classic case of meddling with the books – that we mentioned earlier – getting the company into trouble.  in this case, the “bandra books” were at the centre of the massive corporate fraud which is still under investigation. the supposed bandra branch for which a parallel set of books exist, does not exist in reality. it was a completely made up entity for the corrupt business practices to thrive., a forensic report declared: “out of the rs. 23,815 crores shown as disbursed to bandra book entities in the accounts of the company, only rs. 11,755.79 crores was actually disbursed” to 91 entities, but was portrayed as comprising 2,60,315 home loan accounts. in fact, when the auditor “verified some of these “91 entities”, it was found that 34 of them had invested part of the loan amount back into companies linked with dhfl. according to sebi, if the fake income in the bandra books is taken out, dhfl has been making losses for years on end. the fraud has allowed dhfl to raise a whipping rs. 24,000 crores through public issue of debt securities., in the absence of a credible revival plan, and in the interest of yes bank’s depositors, the rbi (reserve bank of india) took control of yes bank in march 2020. the story of yes bank is nothing short of a john grisham novel. it was founded as an nbfc (non-bank financial company) in 1999, and became a full-fledged bank in 2003. its board members battled constantly for the top spot, with former managing director and ceo rana kapoor being popular for propping up the market by agreeing to disburse loans to corporate borrowers rejected by other banks. the bank would charge a huge upfront fee and most borrowers were defaulters at will., the financial position of yes bank has undergone a steady decline largely due to inability of the bank to raise capital to address potential loan losses and resultant downgrades, triggering invocation of bond covenants by investors, and withdrawal of deposits. the bank has also experienced serious governance issues and practices in recent years which have led to its steady decline. the rbi was in constant engagement with the bank’s management to find ways to strengthen its balance sheet and liquidity. the bank management had indicated to the rbi that it was in talks with various investors and they were likely to be successful., rbi was also engaged with a few private equity firms for exploring opportunities to infuse capital as per the filing in stock exchange dated february 12, 2020. these investors did hold discussions with senior officials of rbi but for various reasons eventually did not infuse any capital. since a bank and market-led revival is a preferred option over a regulatory restructuring, the rbi made all efforts to facilitate such a process and gave adequate opportunity to yes bank’s management to draw up a credible revival plan, which did not materialise. in the meantime, the bank was facing regular outflow of liquidity. it wasn’t long before the bank collapsed and rbi was forced to apply to the central government for imposing a moratorium on yes bank., cafe coffee day, the coffee chain cafe coffee day (which loyalists called ccd) had over 1750 outlets across the nation at one point in time. it was india’s biggest coffee chain in the 2000s. proprieter v. siddhartha came from a prestigious family with a 140-year history of growing coffee beans. a chat with a german coffee maker inspired him to launch cafe coffee day as a rival to starbucks right when the cafe culture had begun to brew among young people. the chain went public in 2015 and it looked like things could only get better, what with rumours of coca cola planning to invest a whopping 2,500 crores into the company., however, things took a turn in september 2017 when the income tax (i-t) department conducted raids at over 20 locations linked to siddhartha. he was reportedly heavily in debt. his coffee day enterprises ltd had seen net loss widening to rs. 67.71 crore in the fiscal year ended march 31, 2018 from rs. 22.28 crore loss in the previous year. this despite revenues climbing to 122.32 crores. he disappeared suddenly one evening in 2019., a letter by him to the ccd board claimed that he was being pressured by “one of the private equity partners” forcing him to buy back shares, a transaction he had partially completed six months ago by borrowing a large sum of money from “a friend”. his dead body was found 36 hours after he went missing in mangaluru. it was apparently a case of suicide., evidence points to siddhartha having taken on debt in his private capacity to buy land and invest in long gestation projects, and angry lenders hounding him for quick returns. while the 2000s decade saw the rise of cafe coffee day, the period also saw debt piling up. the company needed funds for both operations and capex. in 2010, standard chartered private equity (mauritius) ii ltd, kkr mauritius pe investments ii ltd, and arduino holdings ltd (which later transferred the debentures to nls mauritius llc) invested close to $149 million. compulsorily convertible preference shares held by standard chartered private equity (mauritius) ii ltd and the compulsory convertible debenture held by kkr mauritius pe investments ii ltd and nls mauritius llc was converted into equity shares at the time of listing. by june 2015, the consolidated debt was a whopping rs. 2,700 crore, a knot the board couldn’t wriggle out of., jet airways, jet airways was india’s second largest airline until the year 2018 with 13.8% market share. it saw its last flight on 18th april 2019 after running out of funds to carry out operations and left more than 15,000 employees in the lurch. the company’s dues to banks are around rs. 8,500 crores. jet airways owes another rs. 25,000 crores in arrears to lessors, employees and other firms. corporate governance failures by its chairman naresh goyal are the culprits. the downfall of jet airways follows a string of other failed airlines including kingfisher, sahara and deccan, pointing to bad corporate governance in the airline sector., the goyal family owned the majority share in the airline and naresh goyal was the chairman of the board. a promoter-led board is often at the danger of creating a spineless board, often serving at the wish and command of the promoter-chairman. two independent directors, vikram mehta singh and ranjan mathai, resigned from the board in november 2018. the decision by the board to not accept an investment offer by the tata group was financially imprudent as a deal would have infused capital and saved the airline. it also looks as though the decision was made with the sole interest of the promoter than the consideration of the stakeholders as well as the employees., international anti-corruption day 2020 is another chance for india inc to pledge being united against corruption., related articles more from author.

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Corporate Technocracy ESG Governance Beyond Shareholder Democracy or Managerialism

Aisha Saad is an Associate Professor of Law at the Georgetown University Law Center. This post is based on her article forthcoming in the  Columbia Business Law Review . Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here ) by Lucian A. Bebchuk and Roberto Tallarita and Does Enlightened Shareholder Value Add Value? (discussed on the Forum here ) by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita.

ESG (Environmental Social Governance) is in the crosshairs of a conservative campaign against “woke capitalism”. This is evidenced by an aggressive legislative agenda featuring 181 anti-ESG bills proposed or enacted between 2018 and 2023. Attacks on the legitimacy and practical possibility of ESG are starting to bear fruit. For example, the SEC’s new climate-related disclosure rule has been substantially watered down from its initial draft two years ago. Shortly before that, a number of major financial institutions departed the world’s biggest investor coalition on climate change. In recent months ExxonMobil initiated a high-profile legal battle against two of its investors alleging that their climate-focused shareholder proposal is a bad-faith effort to undermine the company’s business. While some anti-ESG advocacy is motivated by political opportunism, more substantive concern with the problems that riddle ESG governance remains unaddressed.

In a new article in the Columbia Business Law Review , I advance a novel paradigm for governing corporate ESG that accounts for the principal-agent challenges undermining prevailing proposals. I argue that a “corporate technocracy” provides a solution for redeeming the possibilities of ESG by addressing and overcoming key governance critiques.

ESG advocates typically embrace one of two corporate governance paradigms to implement their goals—shareholder democracy or managerialism. Shareholder democracy allows shareholders a greater role in defining corporate ESG agendas and in overseeing ESG performance. It mainly focuses on expanding the shareholder proposal process pursuant to SEC Rule 14-8 and relies on the tools of “shareholder democracy”. From an agency perspective, this model introduces principal-agent challenges between stakeholders, the putative principals in a stakeholder governance model, and shareholders as their agents or the sponsors of their interests. It also introduces coordination costs among different groups of shareholders who advance various, perhaps even conflicting, nonpecuniary objectives and agendas. The shareholder democracy camp proposes no direct mechanisms for stakeholders to oversee their shareholder agents. Their proposal also suffers from an ambiguous account of principals and from a nested agency problem.

The second leading ESG governance paradigm, managerialist stakeholderism, relies on granting managers a widened scope of discretion to govern in the interest of a corporation’s stakeholders. Extending managerial accountability to stakeholders presents several problems. First is the problem of defining stakeholders with adequate precision to make their interests administrable. Second is a problem of reconciling conflicting agendas advanced by different groups of stakeholders. Third is the problem of reconciling between shareholder interests and stakeholder welfare when these come into conflict. While fiduciary duties under controlling Delaware law grant shareholder principals legal standing to seek remedies when managerial agents do not account for their interests, an expanded class of stakeholder principals does not come with corresponding duties. This creates an opportunity for rent-seeking. For even the well-meaning manager, managerial stakeholderism fails to provide guidance for negotiating tradeoffs between stakeholders when choosing among different operational strategies, selecting performance metrics, or prioritizing nonpecuniary benefits.

Both the shareholder-driven and management-driven ESG models fail to address the structural agency implications they engender. In my article, I argue that resolving the challenge of ESG governance is not as simple as assigning control rights to shareholders or to managers. Rather, it requires identifying the nature of an ESG objective, new governance dynamics it engenders, agency costs it creates and exacerbates, and devising mechanisms to account for them. I propose that “corporate technocracy” can account for the novel agency challenges generated by the two dominant ESG governance models, while addressing the structural and legal shortcomings of both shareholder democracy and managerialism.

Technocracy refers to rule by technical experts. It emphasizes institutional accountability, promotes legibility and measurability of corporate purpose, and characterizes shareholders and stakeholders as an information source for defining ESG materiality, particularly for emerging or controversial issues. I identify three main features of a corporate technocracy intended to promote efficient and accountable ESG governance: 1) encouraging ESG specific skills and experiences among managers and board members, 2) adopting materiality as a limit to managerial discretion, and 3) creating channels for stakeholders and shareholders to inform ESG materiality. Technocracy depoliticizes both managers’ and shareholders’ roles in defining ESG, relegating managers to the role of administrators rather than statesmen, and shareholders to the role of informational satellites rather than political subjects. Such a model accommodates the liminal and controversial nature of ESG’s “materiality” and provides a normatively and practically defensible solution to the complexities of ESG governance.

For those who seek to redeem the moderate, incremental possibilities of an ESG agenda while avoiding the pitfalls of both shareholder democracy and managerialism, a corporate technocracy that emphasizes institutional capacity, materiality, procedural accountability, and shareholder protections offers a way through the political quagmire.

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