cycles of crisis and regulation: the enduring agency and stewardship problems of corporate...

CYCLES OF CRISIS AND REGULATION 153

Volume 12 Number 2 April 2004

Introduction: cycles of governance

T he disaster that befell corporate Americain 2001/2002 involving a prolonged series

of revelations of malfeasance relating to whatpreviously were regarded as leading corpora-tions, resulted in the dramatic intervention of the US Congress and the passing of the Sarbanes-Oxley Act. Government, regulators,professions, institutional investors, individualshareholders, employees and the wider com-munity struggled to comprehend the implica-tions of what had occurred, which appeared toseriously undermine confidence in the secu-rity of equity investments, the probity of USexecutives, and even the fundamentals ofmarket-based capitalism. For others there was

something of a sense of déjà vu – the historicaldevelopment of corporate capitalism has beenpunctuated by periodic crises and it is at thesepoints of critical inflexion that minds are con-centrated on the need for regulation.

Corporate governance crisis and reform isessentially cyclical. Waves of corporate gover-nance reform and increased regulation occurduring periods of recession, corporate collapseand re-examination of the viability of regula-tory systems. During long periods of expan-sion, active interest in the conformance aspectsof governance diminishes, as companies andshareholders become again more concernedwith the generation of wealth, rather than in ensuring governance mechanisms areworking appropriately for the retention of

© Blackwell Publishing Ltd 2004. 9600 Garsington Road, Oxford,OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

Cycles of Crisis and Regulation: the enduring agency and stewardshipproblems of corporate governance

Thomas Clarke*

Corporate governance crisis and reform is essentially cyclical. Waves of corporate governancereform and increased regulation occur during periods of recession, corporate collapse and re-examination of the viability of regulatory systems. During long periods of expansion, activeinterest in the conformance aspects of governance diminishes, as companies and sharehold-ers become again more concerned with the generation of wealth, rather than in ensuring gov-ernance mechanisms are working appropriately for the retention of wealth, and its use foragreed purposes. This cyclical historical saga revolves around the enduring agency and stew-ardship dilemmas of governance. Complacency concerning corporate governance during con-fident times compounds ensuing crises. Such dilemmas are universal in market systems,though internationally with different systems of corporate governance the unwinding of thissaga has occurred at different times, for different reasons, and with different consequences.Corporate governance is about wealth generation and risk management, and these dutiesrequire continuous and simultaneous performance. Avoiding mandatory restrictive over-regulation requires active market regulation, particularly at times of expansion. The drive tomake corporate governance both improve corporate performance and enhance corporateaccountability will continue.

Keywords: Cycles, governance, crisis, regulation, reform

* Address for correspondence:Centre for Corporate Gover-nance, UTS Sydney, Universityof Technology, Sydney, PO Box123 Broadway, NSW 2007, Aus-tralia. Tel: + 61 2 9514 3479; Fax: + 61 2 9514 3602; E-mail:[email protected]

154 CORPORATE GOVERNANCE

Volume 12 Number 2 April 2004 © Blackwell Publishing Ltd 2004

wealth, and its use for agreed purposes. Thiscyclical historical saga revolves around theenduring agency and stewardship dilemmasof governance. Complacency concerning cor-porate governance during confident timescompounds ensuing crises. Such dilemmas areuniversal in market systems, though interna-tionally with different systems of corporategovernance the unwinding of this saga hasoccurred at different times, for differentreasons, and with different consequences. Cor-porate governance is about wealth genera-tion and risk management, and these dutiesrequire continuous and simultaneous perfor-mance. Avoiding mandatory restrictive over-regulation requires active market regulation,particularly at times of expansion. The driveto make corporate governance both improvecorporate performance and enhance corporateaccountability will continue.

The agency dilemmas of governance

Berle and Means (1932) were the first toexplore the structural and strategic implica-tions of the separation of ownership andcontrol. Berle wrote in the preface of TheModern Corporation and Private Property that “Itwas apparent to any thoughtful observer thatthe American corporation had ceased to be aprivate business device and had become aninstitution” (Berle and Means, 1932, p. v). Thedispersal of equity ownership of companiesraises a series of agency dilemmas highlightedby Margaret Blair (1995, pp. 32–33):

• For firms to operate efficiently, managersmust have the freedom to take risks, makestrategic decisions and take advantage ofopportunities as they arise, and though theyshould remain subject to effective monitor-ing mechanisms, they cannot submit everydecision to a shareholder vote.

• A group of shareholders with a large totalshare of the equity might be more effec-tive at monitoring management, but theirpowers must also be restrained to pre-vent them taking advantage of other shareholders.

• Many investors prefer the advantages of liq-uidity and diversity in their portfolios to thetime and resource commitment involved inmonitoring.

• Investors require accurate accounting infor-mation, but any performance measures can provide misleading information ordistort incentives by encouraging managersto focus attention on inappropriate goals.Further, releasing some kinds of informationcan weaken a firm’s competitive position.

It is in the historical effort to resolve these andrelated agency dilemmas that the principlesand mechanisms of corporate governancehave evolved. In the market-based outsidersystems of the US and UK, the effort to con-strain the behaviour of managers by share-holders led to a narrow focus on financialperformance indicators, short-term horizonsand a relative neglect of other stakeholders inthe enterprise. In contrast, the insider systempre-dates Berle and Means and involves con-trolling shareholders, with companies in closerelationships with banks rather than equitymarkets. In Europe and Asia, this has tradi-tionally encouraged a wider conception of thepurpose of the company, with longer invest-ment horizons and an orientation towards theinterests of a broader group of stakeholders(Clarke, 1998). However, periodically seriousproblems have occurred in the governancesystems of European and Asian countries also,as the long-standing malaise in the Japaneseeconomy illustrates.

US Wall Street crash 1929

The US corporate governance system is gen-erally regarded as the most robust: it is relatedto the largest economy, the largest concentra-tion of leading corporations, the deepest andmost fluid capital markets, a dispersed share-holding base, and well-established laws andregulatory institutions. One of the strengths ofthe US system

lies in its encouragement of self-regulation bycorporate entities, supported by law aroundbasic principles, but not mandated point bypoint. The US system enables people who knowthe corporation most intimately to effect itsoperation, so that the corporation can be posi-tioned to achieve the highest level of efficiencyand competitiveness it is capable of within itseconomic environment. (Millstein, 2001, p. 10)

However, though the US system may havepartly evolved out of the pragmatic develop-ment of case law in response to changing circumstances, this is a sub-text compared tothe major legislative interventions that haveresulted at times of crisis (Figure 1). As Mill-stein notes:

This minimally intrusive system also leavesroom for abuse. The US system has had to makemany adjustments to counter mistakes gener-ated by too much discretion. Our regulatorysystem has evolved over time, in reaction to thefailure of corporations to live up to public expec-tations, and in reaction to outright abuse. Atvarious points in our corporate history, fraud,


© Blackwell Publishing Ltd 2004 Volume 12 Number 2 April 2004

larceny and mismanagement have not been allthat unusual – and ultimately they have led tolaw and regulation. (Millstein, 2001, p. 10)

Expanding confidence in the Americaneconomy of the 1920s, with rising output, sus-tained growth and an increase in personalwealth, led to the speculative euphoria of 1928and 1929, centred on New York, that led to the Wall Street crash. The market collapserevealed market manipulation, insider trad-ing, general mismanagement and a reck-less trampling of shareholder rights, with theloss of 86 per cent of market capitalisationbetween 1929 and 1933 (Soros, 1998, p. 145).The long recession that followed provokeddeep misgivings about the nature of the eco-nomic system unleashed upon an apparentlydefenceless public. Congress enacted the Securities Act 1933 and the Securities andExchange Act 1934 to address some of thesemisgivings, primarily through the regulationof corporate financial disclosure to improvetransparency. The laws and rules that ensuedimposed liability on officers and directors forfraud and abuse, established the SEC toenforce these measures, and to regulate solici-tation of shareholder proxies by public corpo-rations. “Congress opted for honest and fairdisclosure as the primary tool for securitiesregulation, obviating the need for moredetailed substantive regulation” (Millstein,2001, p. 11).

Post-war expansion

In the long post-war expansion of the USeconomy, concerns regarding corporate gover-nance were subordinated to enjoyment of thenew-found opportunity and prosperity. Aslong as the economy was doing well, and UScorporations were successfully growing, thefact that managers had become the domi-nant players in a new form of “managerialcapitalism” was not of great consequence.Times were good, and executives were able to assume iconic status, in a system thatappeared self-regulating as well as self-perpetuating, which delivered corporate en-gines of wealth creation that were the envy of the world, such as IBM, Sears, GE, Exxon,US Steel, Alcoa, Proctor and Gamble and GM(Millstein, 2001, 13). Slowly, this complacencybegan to unravel, as the economic buoyancyon which it was based began to slip away. Inthe 1970s, a number of corporate scandalsraised questions not only concerning the effec-tiveness of management, but of the compe-tency of the boards appointed to oversee them.For example, in the early 1970s the SEC inves-tigated managerial misconduct in the largestrailroad company Penn Central, criticising the board for failing to have outside directorswith sufficient financial acumen to detect the company’s financial difficulties. By 1997,the SEC approved a NYSE rule requiring all listed companies to establish audit com-

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Figure 1: Regulation in the United States



mittees comprised solely of independentdirectors.

The rise in regulatory concern was linked toa fall in economic performance. The 1970s wasa period in which US corporations appearedto be intent on expansion and conglomerationfor their own sake, as symbols of the aggran-disement of their executives, rather than interms of superior returns. As they becamelarger and more top-heavy, US corporationsfailed to take sufficient notice of the growingcompetitive threat of foreign imports. By the1980s, it appeared as if the US corporatesystem had turned in upon itself, with agrowing fascination with LBOs, MBOs, junkbonds, as companies themselves “becametradeable commodities rather than essentialengines of wealth” (Millstein, 2001, p. 15).Managers came to believe themselves to becompelled to focus on short-term stock marketperformance at the expense of strengtheningtheir businesses in the longer term (Porter,1992). A paradox of this period is that it rep-resented a reassertion of the power of financialmarkets over corporate executives. Thegrowth in financial engineering paralleled thedecline of many of the leading US corpora-tions of the mid-20th century.

UK Robert Maxwell MMC, BCCI,Polly Peck 1990/91

The UK had some similar experiences to theUS in terms of the post-war recovery and longperiod of complacency regarding corporategovernance, though economic growth wasmore stumbling, and executives had less to beself-satisfied about. The financial exuberancethat arrived in the 1980s was halted in themarket crash of 1987, and later high interestrates precipitated a series of high profile cor-porate collapses in 1991, including RobertMaxwell’s MMC, Polly Peck and BCCI (theBank of Credit and Commerce International,whose primary commercial activity turned outto be money laundering). Public confidenceand trust in the efficiency and reliability of thegoverning structures of industry was severelyshaken in that each of these corporationsreceived healthy audit reports shortly prior to their collapse (Clarke and Bostock, 1994).Consequent concerns included the standardsof the audit and accountancy professions(Cadbury, 1992); the lack of accountability, dis-closure and transparency of boards to share-holders (Monks and Minow, 1991); concernsover the adequacy of board structures andprocesses (Lorsch and MacIver, 1989); thequality of directoral competencies; the appar-ent lack of corporate social responsibility; the

destabilising impact of the growth of mergerand acquisition activities (Pound, 1992); theshort-term basis of corporate performance(Gregg et al., 1993); the spate of business fraud;and the evident weakness of corporate self-regulation. These problems were exacerbatedby the development of more complex corpo-rate structure and, as a result, modern com-pany law was unable to keep pace with moderncorporate reality (Hopt, 1984).

As one of the greatest proponents of activecorporate governance, Sir Adrian Cadbury’sreport published in 1992 was to have consid-erable influence not just in the UK, but inmany other countries around the world thatadopted similar corporate governance codesof practice with the inspiration of Cadbury,and in similar circumstances. Further UKreforms of corporate governance followed the Cadbury code, with the Greenbury Report(1995) proposing guidelines for director remu-neration; the Hampel Report (1998) focusingon disclosure and best practice; the CombinedCode (1998) outlining a mandatory disclosureframework; and the Turnbull Report (1999)offering advice on compliance with manda-tory disclosure. This was followed by a threeyear inquiry Modern Company Law Review,which for the first time addressed the funda-mentals of the reform of company law, whichin the UK was particularly antiquated (Figure 2).However, any sense that universally im-proved standards of corporate governancewere gradually bringing greater stability andsecurity in international equity investmentswas abruptly dispelled by the looming Asianfinancial crisis.

Asian financial crisis 1997/98

The ink was barely dry on a series of high-profile reports by the World Bank (1993, 1996)celebrating the unique combination of highinvestment and sustained high growth rates ofthe Tiger economies of East Asia as an inspi-ration to the other developing economies,when the Asian financial crisis broke. Erupt-ing in June 1997 in Thailand, it quickly sweptthrough the Philippines, Indonesia, Malaysia,Singapore and South Korea, impacting uponTaiwan and Hong Kong. Meanwhile Japanwas experiencing a deepening crisis in itsfinancial institutions. As Michael Camdessus,the Managing Director of the InternationalMonetary Fund confessed, “A universe of spe-cialists did not see the Asian crisis come. Wedid not see the violence of the contagion. Itwas so strong, quick and struck in the mostunconnected places” (South China MorningPost, 2 October 1998). Financial liberalisation



and large current account deficits financed byshort-term foreign loans, left these econo-mies open to large international movements of capital. Collapsing currencies, equity andproperty markets in East Asia in 1997–98exposed underlying vulnerabilities both ingovernance structures and values. However,an international confidence crisis was fuelledby a growing realisation of the structuralweaknesses of economies often governed bycrony capitalism, opaque accounting andauditing systems, and too close relations be-tween business and the state (Clarke, 2000).The question remains how could all this havehappened in economies that were formerlycelebrated for their robustness and efficiency?In a modern economy, companies are disci-plined by a combination of internal and exter-nal controls. Internally, the company directors’duty is to ensure adequate financial controlsare exercised, and this is reinforced by inde-pendent audit of the annual accounts. Exter-nally, there is a legal framework of corporatelaw, policed by regulatory authorities. Finally,there is the capital market that exercises a com-mercial discipline upon companies. Thoughthis institutional structure was broadly inplace in the East Asian economies, theproblem is that this did not work properly.Given the systematic nature of the problems ofcorporate governance in East Asia, only a fun-

damental programme of reform on institu-tions and practices, conducted in an energeticand committed manner over a considerableperiod of time, is likely to produce results.There is much evidence of a profound inclina-tion towards reform in the countries con-cerned, but should this dissipate as the EastAsian economies move towards recovery,there is an array of external agencies with aninterest in ensuring the process of reform isadhered to. The IMF, World Bank and AsianDevelopment Bank all have launched signifi-cant initiatives to encourage and facilitate thereform process. International investors areunlikely to be sympathetic towards countriesand companies that are not significantly im-proving their corporate governance standards.However, the question arises concerning theappearance and substance of reform, and theprospect of regulatory capture by businessinterests that never identified with the reformprocess.

OECD Principles of CorporateGovernance (1999)

The experience of the Asian crisis thatrevealed a systemic failure in corporate gov-ernance was a spur to the publication by theOECD of its Principles of Corporate Governance

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Figure 2: Regulation in the United Kingdom



in 1999. This framework of principles wasendorsed by the World Bank, InternationalMonetary Fund and Asian DevelopmentBank. The OECD stated:

Corporate governance is only part of the largereconomic context in which firms operate, whichincludes, for example, macroeconomic policies,and the degree of competition in product andfactor markets. The corporate governance frame-work also depends on the legal, regulatory andinstitutional environment . . . While a multi-plicity of factors affect the governance and decision-making processes of firms, and areimportant to their long term success, the Prin-ciples focus on governance problems that resultfrom the separation of ownership and control . . .The degree to which corporations observe basicprinciples of good corporate governance is anincreasingly important factor for investmentdecisions. Of particular relevance is the relationbetween corporate governance practices and theincreasingly international character of invest-ment. International flows of capital enable com-panies to access financing from a much largerpool of investors. If countries are to reap the fullbenefits of the global capital market, and if theyare to attract long term “patient” capital, cor-porate governance arrangements must be credi-ble and well-understood across borders. Even ifcorporations do not rely primarily on foreignsources of capital, adherence to good corporategovernance practices will help improve the con-fidence of domestic investors, may reduce thecost of capital, and ultimately induce morestable sources of financing. (1999, p. 2)

Having indicated the advantages of movingfrom a relationship-based to a rules-basedmodel of corporate governance, the OECDindicated the common elements that corporategovernance framework should possess. Thisframework of corporate governance principleswas intended to have universal appeal, butthere was some implication that they wereessentially derived from the fundamentals ofthe market-based system, and that they wereparticularly aimed at the exponents of theinsider systems with relationship-based ap-proaches, especially in the developing econo-mies where corporate governance failure wasassumed to be more likely. In the event, thenext cycle of spectacular corporate governancefailure occurred a lot closer to home thananticipated.

Enron, WorldCom, Tyco, Adelphia,Global Crossing . . . 2001/2

Any sense that the developing economiessimply needed to learn from the robust,

market-based corporate governance systemsof the Anglo-Saxon world were rudely dis-pelled by the spectacular sequence of US corporate crises at Enron, WorldCom, TycoInternational, Adelphia Communications,Global Crossing, Quest Communications, Com-puter Associates and Arthur Andersen. Thecollapse of Enron, the largest bankruptcy inUS history, led to thousands of employeeslosing their life savings tied up in the energycompany’s stock. Federal indictments chargedEnron executives with devising complexfinancial schemes to defraud Enron and itsshareholders through transactions with off-the-books entities that made the company lookfar more profitable than it was. WorldComironically named one of Fortune magazine’smost admired global companies in 2002,wrongly listed over $3 billion of its 2001expenses, and $797 million of its first quarter2002 expenses as capital expenses, which arenot reflected in the company’s earningsresults. WorldCom agreed to restate all of itsearnings results for 2001, as well as those forthe first quarter of 2002. The SEC in June 2002charged WorldCom with massive accountingfraud. In January 2002, Global Crossing filedfor Chapter 11 bankruptcy protection, listingassets of 22.4 billion and debts totalling 12.4billion dollars, the fourth largest bankruptcyin US history. The company was accused of employing misleading transactions andaccounting methods, which gave the appear-ance that the company was generating hun-dreds of millions of dollars in sales and cashrevenues that did not actually exist. At Adel-phia Communications, the former CEO JohnRigas, two of his sons, and two other formerexecutives were charged with conspiracy,securities fraud and wire fraud and withlooting the company of hundreds of millionsof dollars. At Tyco, tens of millions of dollarsin fraudulent bonuses were uncovered, and$13.5 million dollars in unauthorised loans tokey Tyco managers. This was an unprece-dented display of accounting fraud, regula-tory failure, executive excess and avoidablebankruptcy, with resulting widespread disas-trous losses incurred by employees, pensionfunds and investors. What was so alarmingwas that each element of the corporate gover-nance system in these cases appeared to havefailed, as the Australian Financial Review re-cently commented,

The collapse of Enron has disclosed that everycomponent of the infrastructure of US capital-ism was dysfunctional. Companies’ accountswere misleading, their auditors conniving, theirlawyers conspiring, the ratings agencies asleep,and the regulators inadequate. “Faith in corpo-



rate America hasn’t been so strained since theearly 1900s,” claims BusinessWeek magazine.(“US Crisis of Confidence”, Australian Finan-cial Review, 4/5 May 2002, p. 24)

Sarbanes-Oxley Act 2002

With the Nadaq and NYSE in a state of col-lapse, the US Congress enacted on 30 July2002, with an alacrity induced by generaloutrage, the Sarbanes-Oxley Act. This legisla-tion significantly changes the corporate governance and reporting requirements ap-plicable to any company, including any non-US company, that is required to file reportswith the SEC because it has listed securities onthe NYSE or a Nasdaq market, or made a reg-istered offering of securities in the UnitedStates. Many provisions of the Act will berefined by further SEC rule-making, but theimmediately effective provisions include:

• Each annual report filed must be accompa-nied by CEO and CFO certifications that the report fully complies with reportingrequirements and fairly presents, in allmaterial respects, the companies financialresults. Knowing or wilful certification ofinaccurate statements is subject to a fine orcriminal penalty (s. 906).

• The company’s CEO and CFO must certifystatements concerning the company’s inter-nal accounting controls and disclosure controls and “disclosure controls and pro-cedures” and the ongoing oversight of these controls, as well as the informationcontained in the annual report.

• The Act prohibits personal loans from companies to their directors and executiveofficers.

• If a company restates its accounts due tomaterial non-compliance of the company, asa result of misconduct, its CEO and CFOmust reimburse the company for any bonusor equity- or incentive-based compensa-tion paid, and any profits from sales of the company’s securities realised, duringthe 12 month period after the first daypublic issuance or filing of the documentcontaining the non-compliant financialinformation.

• The Act provides protection for employeeswho assist in investigations or proceedingsthat involve violations of US federal secu-rities laws and fraud statutes.

In addition, the following series of provisionswill be implemented by SEC rulemaking:

• No later than 26 April 2003, the SEC was to adopt rules to require the NYSE and

Nasdaq to prohibit the listing of a compa-nies securities unless the company has an audit committee comprised entirely of independent directors, that meets SEC re-quirements as to its responsibilities andoperation.

• The Act creates an oversight board to regis-ter, inspect and discipline public companyauditors and auditing standards.

• The Act requires the SEC to adopt rules torequire reporting companies to include intheir annual reports a management reporton internal controls and to require indepen-dent auditors to attest to, and report on,these management reports.

• By 26 January 2003, the SEC was to adoptrules to require the disclosure of off-balancesheet transactions and whether or not thereporting company has adopted a code ofethics for senior finance officers.

NYSE and Nasdaq standards

Meanwhile, the NYSE and Nasdaq issued newlisting standards intended to harmonise withthe Sarbanes-Oxley Act. The new minimumstandards embody, in significant respects,what have been up to now recommended bestpractices:

• Populating Boards with a majority of inde-pendent directors.

• Tightening standards of independence.• Further restricting audit committee compo-

sition and adopting new responsibilities foraudit committees.

• Instituting wholly independent compensa-tion and nominating/governance commit-tees and adopting specific responsibilitiesfor these committees.

• Convening regular meetings restricted tothe non-management directors.

• Performing regular board and committeeevaluations.

• Publishing company-specific governanceguidelines and codes of conduct and ethics.

Australia HIH, OneTel . . .Corporate governance down under 2001/2

The United States was not alone in feeling asense of acute unease regarding standards ofcorporate governance, as in Australia at thesame time two corporate collapses occurredwhich were in context, if not in scale, almostas spectacular as those that had occurredacross the Pacific. The A$5 billion HIH Insur-ance failure in 2001 was the largest bankruptcy



in the country ever. As a consequence, for aperiod much of the insurance industry in thecountry was jeopardised, and many peoplefound it difficult or impossible to obtain public liability insurance or professional in-demnity insurance, and their livelihoods werethreatened. A Royal Commission into theaffair was called, and the CEO and a parade of executives and directors were called to give evidence over a 12-month period of what was probably the most intensive cross-examination ever experienced by Australianexecutives. What transpired was a catalogueof accounting, actuarial and auditing failure,unrestrained executive greed, the completefailure of the Board to monitor or even knowwhat was occurring, excessive CEO powers,poor business decisions and a consistentfailure to exercise the responsibilities of apublic company.

At One-Tel, two young entrepreneurs hadsecured large investments from the Murdochand Packer business empires in their telecomsstart-up. The appearance of startling successwas secured by selling telephone services atsuch low prices that the subscriber list grewwith breathtaking speed, encouraging furtherinvestments in the company. But a fatal flawin the business model of the company was thatthe telecom services were being offered to sub-scribers at lower than the price the companywas paying for them itself. The business could only survive as long as it could raisenew capital investment more rapidly than itwas burning money. Mounting losses wereignored, until inevitably bankruptcy ensured,with both Murdoch and Packer losing hun-dreds of millions of dollars, together with anarmy of small investors.

The Australian government tried to appearunruffled by these events, insisting that themore robust and long-standing disclosurerequirements in the Australian market madeany further unanticipated corporate failuresunlikely. However, a further round of the Australia Corporate Law Economic ReformProgram (CLERP 9) 2002 quickly published anew series of requirements for companies reg-istered in Australia:

• To ensure the independence of the auditor:– there needed to be the periodic rotation of

audit partners;– non-audit services offered by the audit

company were to be disclosed;– audit committees were to become

mandatory in the Top 500 ASX listed companies;

– auditors must attend the AGM of thecompany;

– auditor should be able to limit liability.

• To ensure continuous disclosure:– the penalties for companies involved in

market manipulation were increased to amaximum of A$1m;

– ASIC was to impose penalties via in-fringement notice;

– Penalties were to extend beyond thecompany to any person involved;

– ASX’s tougher approach to disclosure toavoid false markets was endorsed.

• To improve the conduct of shareholdersmeetings:– there should be plain English

notifications;– rules on the bundling of resolutions.

• Annual Reports were to include:– disclosure of directors other

directorships.• Whistleblowing:

– employees were encouraged to report toASIC suspected breaches of law.

Conclusions

Despite the strenuous efforts at reform, thecyclical pattern of stock market booms en-couraging and concealing corporate excessesis likely to continue. When recession high-lights corporate collapses, statutory interven-tion invariably occurs. To avoid mandatoryrestrictive over-regulation, active voluntaryself-regulation – particularly in times of con-fidence and growth – is necessary. There willnever be a “perfect” system of corporate governance. It is important that the mostobvious abuses will be outlawed, and loop-holes closed, but the ingenuity of self-interestwill lead to the devising of new schemes to evade accountability. Moreover, marketsystems are competitive and volatile anddynamic systems of governance will reflectthis, in the positive sense of pursuing newopportunities, but also, in some cases, in thenegative sense of exploiting new circum-stances to deceive others. This is why corpo-rate governance is about both wealth creationand about risk-management. Continued ef-forts to make corporate governance both im-prove corporate performance and enhancecorporate accountability are vital and ongo-ing. The continuous raising of standards ofdisclosure will be critical to effective corpo-rate governance. The reason corporate gover-nance standards and reforms will increase infuture as a matter of public concern is thatmore of the public will have more of theirwealth invested in companies they will insistshould behave responsibly. The volatility ofmarkets is part of the cycle of risk and return,and the significance of corporate governance



is to mitigate the most damaging outcomeswhilst encouraging the most positive.

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“We have a corporate governance problem in this country. We are in a period where somethink there are two tiers of people: those who obey the law and those who don’t.” US FundManager Jim Cramer.

cycles of crisis and regulation: the enduring agency and stewardship problems of corporate...

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