Corporate Structure and Governance

Reflecting on recent corporate failures, Banking and other industry, the charges of accounting fraud make me think of the current environment and how improvements in management structure could help mitigate some occurrences. Considering the enormity of the impact that finance has on the economy within all industries, there appears to be more tolerance for ethical lapses and sole autonomous leaders. Current incentives have encouraged immediate results at almost any cost. The end result in these cases has been the enrichment of the executive class in the short-term, growing societal inequality, and corporate failures endured by the rest of the employees in the longer-term.

Some failures that come to mind include Enron, WorldCom, Lehman, and AIG. While the causes of failure are quite different among various industries, banking has a greater economic impact in terms of asset losses. Moreover, the reasons for failure among the other industries differ dramatically and in a 2004 paper, McKinsey and Company suggested changes that would improve corporate governance. The report is entitled “Investor perspectives on corporate governance – a rapidly evolving story” and lists 6 themes of importance:

1. Rapid extension of worldwide governance codes;

2. Increased focus on board professionalism;

3. Selective redesign of corporate leadership roles;

4. Re-assessment of corporate reporting needs;

5. More intensive external scrutiny of governance; and

6. Increased attention to corporations’ impact on society.

An addendum to the McKinsey list, or even within, I propose a greater check/separation of the CEO-CFO relationship. The CFO would also report to the Board of Directors through the Audit Committee to minimize the possible influence to alter the appropriate reporting of performance results and financial/strategic risks. This organizational structure is no different than the Matrix Management structure used by most large corporations usually at mid- to low-level management and can be applied at the Executive level. The BOD’s Audit Committee would serve as a steering council to ensure effective financial reporting recognition of activity and risks in addition to improved strategic decision making. However, no corporate hierarchical, structural change will matter if no one knows the true value or risk of the assets on the books (mortgage backed securities).