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1.1 Introduction

The aim of this thesis is to examine the evolution of Corporate Governance in the United Kingdom and the affects which corporate scandals had on it. This aim is achieved through the following objectives:

The development of Corporate Governance in the United Kingdom.

The affect of corporate scandals on stakeholders.

Corporate scandals and Corporate Governance.

Corporate Governance has been a source of discussion among investors and entrepreneur and it has gone through many changes in recent years. It is defined as the structures and processes for the direction and control of companies (World Bank, 2005). The importance of Corporate Governance came into enlightenment after the collapse of high profile organisation such as Robert Maxwell (Parkinson & Kelly, 1999). These corporate failings lead to UK Corporate governance being improved (Iskander & Chamlou, 2000). The Dramatise change in Corporate Governance affected many big organisations with a number of challenges. But the key aspect of Corporate Governance is Risk-taking is fundamental to business activity (Spira & Page, 2003), which means risk taken by the organisation must be controlled properly and from here Risk Management comes in.

To select Corporate Governance as a dissertation topic large amount of research activities with many sources of literature is being used. One of the major problem realised with this topic was, there was ample amount of literature available and that to is very difficult to select the most appropriate one. But problem was solved by concentrating on academic literature, which is mentioned in brief in this dissertation.

The structure of this dissertation is as follows, chapter one will focus on literature review, which will provide some basis knowledge for this dissertation. The main aim of the literature review is to highlight the various factors associated with the evolution of Corporate Governance. This section will also include Corporate Governance in the USA which will only give some idea how the legislation is different in two countries. Secondly we will discuss some scandals (Arthur Andersen and Robert Maxwell). The purpose of choosing these two case is to show by which Corporate Governance reached the stage of maturity. Robert Maxwell scandal which occurred in the UK and Arthur Andersen scandal occurred in the United States, which will be the second chapter of this dissertation which actually gave the birth to Corporate Governance. And the last part of the dissertation which is third and final chapter will describe some limitation and conclusion.

Chapter 1

Literature Review

The aim of this section is to provide an overview in order to analyse different aspect of Corporate Governance and scandals which are linked with the aim and objective of this dissertation. This part of the dissertation will describe about, what Corporate Governance actually is, discussing definitions. Further it will present back ground, development of Corporate Governance in UK, need for Corporate Governance and Corporate Scandals.

What is Corporate Governance?

"Corporate governance is a field in economics that investigates how to secure/motivate efficient management of corporations by the use of incentive mechanisms, such as contracts, organizational designs and legislation. This is often limited to the question of improving financial performance, for example, how the corporate owners can secure/motivate that the corporate managers will deliver a competitive rate of return",, Mathiesen [2002].

Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment, The Journal of Finance, Shleifer and Vishny [1997, page 737].

Some commentators take too narrow a view, and say it (corporate governance) is the fancy term for the way in which directors and auditors handle their responsibilities towards shareholders. Others use the expression as if it were synonymous with shareholder democracy. Corporate governance is a topic recently conceived, as yet ill-defined, and consequently blurred at the edge. Corporate governance as a subject, as an objective, or as a regime to be followed for the good of shareholders, employees, customers, bankers and indeed for the reputation and standing of our nation and its economy Maw et al. [1994, page 1].

Corporate Governance is 'the structures and the process for the direction and control of companies' (World Bank, 2005). This definition only explain the involvement of Corporate Governance, however it fails to explain in depth about Corporate Governance.

The other definition says 'the system by which companies are directed and controlled' (Cadbury, 1992, Coyle, p4). The Organisation for Economic Co-operation and Development (OECD, 1998) explain Corporate Governance in more details it says 'A set of relationships between a company's board, its shareholders and other stakeholders. It also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined' (United Nations, 2003, p1).

If we look at the definition provided by the OECD (1998) we can say Corporate Governance involve number of parties such as stake holder, share holder and board, and the goal of an organisation can be achieved by using Corporate Governance. And lastly we can say Corporate Governance measures the performance of the company.


Many large organisations in UK suffered because of the Corporate Governance and this was the main reason for the number of changes in it throughout the years. One of the secondary reasons for this change was the economy and society as well. In this section we will focus on this area, the change occurred in this area and the impact of these changes on corporate world.

Dubbed the Enron of England, the South Sea Bubble was one of history's worst financial bubbles (Stock Market Crash! 2006). This was started in 1711, when a war felt Britain in arrears by 10 million pounds. And this debt was financed by the South Sea Company at 6% interest. A part from the interest, Britain also gave the right to trade exclusively in the South Seas. The failure of the South Sea bubble was the expectation of the directors lying about the profits, as the South Sea Company issued stock to finance its operation. Interested Investors quickly realised that company is having monopoly in the market, so the share price increased drastically from the scratch. Speculation became rampant as the share price kept skyrocketing (Stock Market Crash! 2006). And after certain period the management realized that the company share was overvalued. Well we can say that this point in time this happened because there was none of the guidance documents which are available today.

Cadbury Committee told this initiative and they produce the first guidance document in the UK, which was chaired by Adrian Cadbury (Cadbury, Report, 1992). The Cadbury Committee Report included a number of financial aspects of corporate governance i.e. the role of the board, auditing and reporting of financial information to shareholders (Cadbury Report, 1992).

Cadbury Committee Report was structured in such a manner that the organisations can easily follow it. Here are some outlines of Cadbury Committee Report, Section 4 deals with the structure of board, and there should be executive directors and independent non-executive directors. Section 4.11 explains the purpose of having non-executive directors. The responsibilities of directors which are mentioned in section 4.28. Internal control is discussed in section 4.31 of the Cadbury Report (1992) which provided guidance on keeping records of accounts and reducing the chance of fraud (Cadbury, 1992). Section 4.33 which explain about Audit committee and there relationship with the board members and the appointment of external auditors. However Cadbury Committee report fails to unveil director's remuneration, which leads to the introduction of the Greenbury Report.

The chartered Institute of Management Accountants (1999) explains the purposes of having Greenbury Report, to encourage more transparency with the organisation. It provides guidance on director's salaries, bonuses, and also accountability (Chambers 2002).

Section A of the Greenbury Report discusses about the director's remuneration and director's remuneration should be decided by a remuneration committee. This committee should include non-executive directors who will decide upon the remuneration of the director's (Greenbury, 1995, section A1). The remuneration committee should provide report to shareholders which are discuss in Section B of the Greenbury Report disclosure and approval provisions (Greenbury, 1995, section B). Section C of the Greenbury Report discuss the performance of the company with there director's. The performance- related component of remuneration should be plan to align the interest of Directors and shareholders and to give directors enthusiastic incentives to execute at the highest levels (Greenbury, 1995, section C). Section D of the Greenbury Report discusses service contracts and compensation (Greenbury Report, 1995, Section D). This part focus on, how much compensation a director is entitled in the event of leaving the company before his/ her contract expires. This means that shareholders know accurately how much it would cost them if they are firing any one of there director or director's.

Hampel and the Broadening of 'Control'

Hampel's Committee on Corporate Governance (1998) resulted in both a step fore and a step back from the earlier Cadbury report. Hampel elaborated the concept of internal control 'business risk assessment and response, financial management, compliance with laws and regulations and the safeguarding of assets, including the minimising of fraud' (Hampel, 1998, pp. 53-54). The authors clearly stated that 'They are not concerned only with the financial aspects of governance' (Hampel, 1998, p.53). Hampel took a broad view of internal control, stating that it is the responsibility of directors to establish a robust system of risk management, to recognize and appraise potential risks in every aspect of the business operation. The 'control' concept of Hampel's was welcome by many organisations, which also include the Association of British Insurers (ABI) which recognise it a realistic approach that motivated companies to deal with their compliance with the new corporate governance requirements (Fagan, 1999). Neil Cowan, Vice President of the European Confederation of Institutes of Internal Auditing, say that Hampel's view of risk management represented 'a welcome restatement of that part of a Board's prime responsibility for devising a strategy that will ensure the company's continued existence' (Cowan, 1997).

The Turnbull Report

A committee chaired by Nigel Turnbull produce a new report titled, Internal Control: Guidelines for Directors on the Combined Code, under the support of Institute of Chartered Accountants in England and Wales (ICAEW, 1999), it was published less than two years after the Hampel Committee on Corporate Governance was published. The document issued by Turnbull committee filled may gaps left by Cadbury and Hampel. The report was drafting by the recommendations of the Combined Code and the underlying Hampel recommendations that directors review all controls. The main aim of the report as agreed by large organisation including ICAEW and the London Stock Exchange was to provide guidance to the listed companies and to implement the requirements in the Code relating to internal control. But the main purpose of the report was giving the relaxation to companies to explain their governance policies, the guidance obliged the board to report on the effectiveness of the company's system of internal control.

This centre on internal control is attached to the idea of a dynamic company, which requires non-stop monitoring and auditing. The Report states that: A company's objectives, its internal organisation and the environment in which it operates are frequently developing and, consequence, the risks it faces are frequently altering. So there should a sound internal control system which depends on a regular assessment of the nature and extent of the risks to which the company is exposed. As profits are, in part, the prizes for successful risk-taking in business. Internal Control purpose is to help manager and control risk appropriately rather than to eliminate it. (ICAEW, 1999, p.5, para.13).

Turnbull Committee involve two steps to interpret, firstly to identify the risk and how the risk is managed and evaluated. Secondly, assess the effectiveness of the internal control system, it procedure and effectiveness.

Some other report which focuses on Corporate Governance in UK are Rutteman Report 1994 on 'Internal Control and Financial Reporting', Myners Report 2001 on 'Relationship between institutional investors and companies', Tyson Report 2003 on 'Recruitment and development of non executive directors' (Chartered Institute of accountants for England and Wales, 2006).

Why use Corporate Governance?

The argument that the company should be subject to legal regulation at least some of their actions tends to be couched in term of 'Market failure'. Companies are recognized to have characteristics, particularly the scale and scope of their operations, which make the market governance of their actions imperfect. The purpose of the regulation is to iron out those imperfections and to restore market governance. Now in some cases this may mean very extensive legal regulation indeed, and in exceptional cases, particularly in respect of the so-called natural monopolies, an acceptance that market governance must be abandoned in favour of economy governance. This is a topic, which is growing in importance following a number of high profile failures. In UK stock market as per Financial Aspects of Corporate Governance,1992 all listed companies need to publicly state whether or not they comply with Corporate Governance. If the Investors they are not fulfilling this requirement, they may full loss as this is an incentive for the listed companies to use Corporate Governance otherwise investors may choose to invest elsewhere.

According to James Madison (Bavly, 1999) No man is allowed to be judge in his own case, because his interest would certainly bias his judgement and, not improbably corrupt his integrity described by James Madison (Bavly, 1999). Because of the Corporate Governance, companies are run in a fair and efficient manner to maximise the wealth of the organisation rather than maximise the profit and that no one person should have too much control.

The Institute of Chartered Accounts for England and Wales (ICAEW, 2002) discuss the importance of Corporate Governance in more details, ICAEW (2002) explain that because of the corporate scandals, Corporate Governance came into motion or it can also be said corporate scandals is the main driver for Corporate Governance as it highlights what can actually happen and also the devastating affects.

The ICAEW (2002) also indicated that because of the awareness and the increased knowledge of shareholders have lead to companies to improve there presentation in the market and also to improve the way in which they operate in order to attract investment. Shareholder influence affect the structure of an organisation (Investments) so they having a positive impact on Corporate Governance as it is a key driver for the implementation of Corporate Governance to many companies.

Iskander and Chamlou (2000) explain that, to increase the market value and the market share good corporate Governance is essential. This is a key subject to consider because if the management is not performing efficiently and effectively, then money is going to be spent on agency problems, which arise. However with good Corporate Governance the board is working more consistently.

Coyle (2003/2004) explains that there is also a difference of interest between directors of a company and its shareholders'. The directors need to earn more benefits and high remuneration whereas the shareholders want the company to be earn more profit or to maximise the profit of an organisation so that they can cover there cost of capital. Corporate Governance allows shareholders and Directors to set criteria to come to an friendly agreement. This allows to set out exact guidelines to each other thus reducing conflict.

(PriceWaterHouseCooper, 2004)

The above figure is taken from a survey conducted by PriceWaterHouseCooper in year 2004, undertaking 134 executives. The executive were ask, what was the main reason for the failure of Corporate Governance. 37% of the executives replied because of the compliance failures and 26% replied because of the poor management and also because of the poor leadership. The conduct of senior executives was also a major risk according to 15% of directors. The figure clearly shows that Corporate Governance strongly focuses on activities such as leadership of executives.

Corporate Governance in the USA

Corporate Governance in the United States of America (USA) is different in some way from United Kingdom, however there are some similarities. In America the first Corporate Governance documents, was Treadway Report (Chartered Institute of Management Accountants, CIMA, 1999). It emphasis on auditing, which it stressed must be separate from directors (CIMA, 1999). There are many forces that have led to the development of corporate governance in the U.S. as it appears now. The problem of the corporate governance in U.S is that there is not a set of laws or regulation to decide how organization matters are to be addressed. There are two side-by-side laws first is Federal law and Second is state laws, and traditionally corporate governance is a matter of state, so it is determine by the sate laws. This recommendation of corporate governance was aimed at reviewing the performance and profitability of companies through an independent organization in order for shareholders to have a true picture of how the company is performing. The Committee of Sponsoring Organisations of the Treadway Commission (COSO) then produced a further document on Corporate Governance which was based on Internal Control (CIMA, 1999). This was designed to discuss how a company should be run and appropriate controls, which would ensure this.

After the corporate scandal of Enron, the Sarbanes-Oxley statute is really a federalization of corporate law. Sovereign of written statutes and regulations, the U.S. is a common law system so a great deal of the law on corporate governance comes through judicial decisions. The United States of America introduced corporate governance legislation in 2002, the Sarbanes Oxley Act (SOX).

High profile corporate collapses due to a number of circumstances including financial reporting irregularities leading to a lack of investor confidence and public trust. The Financial Services Authority (FSA) which is the regulating body of the Financial Services sector in the UK did a number of things in reaction to the Enron scandal (Rouston, 2003). Rouston explains that the FSA conducted a review of listing rules and looking further into the matter of accountancy and auditing (Rouston, K, 2003).

However in the USA the response to the growing number of Corporate Scandals and most recently the Enron scandal the USA was different than the UK. The Sarbanes-Oxley Act was introduced in 2001 as a direct response to a number of corporate failures (Matyjewicz and Blackburn, 2003).

The Sarbanes-Oxley Act (2002) was useful as it meant that Corporate Governance would have to be taken seriously and that there would be company on the stock exchange who did not comply with SOX (2002). Although the UK does not have legislation many companies do use corporate governance, the Combined Code, in order to attract investors (Financial Aspects of Corporate Governance, 1992).

The three reasons for the development of Corporate Governance in USA:-

(The Continuing Evolution of Corporate Governance in the United States- Thomas A. COLE Chairman, Executive Committee, Sidley Austin Brown & Wood LLP)

Capitalistic view has clearly prevailed with specific regulations imposed relating to the treatment of employees and such.

The second factor in the development of U.S. corporate governance is that there are very widely held corporations.

Another factor that has shaped corporate governance is the rise of the institutional investor.

Paying for Good Governance

One of the survey done by Mckinsey & Company in 2000 all the investors are willing to pay more for a company with good board governance. Nearly 83% in latin America, 81% in US and 89% in Asia they consider that there should be proper control upon the working of the organisation.

Source: Mckinsey & company, Investor opinion (2000)

Corporate Governance: A Mandate for Risk Management?

Risk Management is described as identifying and managing a firm's exposure to financial risk. Corporate Governance as describe above is a set of rules, procedure and structures by which investors, who invest in an organisation assure themselves that they are getting pre-determined return and they also ensure themselves that there investment is used and invested in efficient portfolio and the managers are not misusing there investment. It is at the top of the international development agenda as emphasised by James Wolfensohn, President of the World Bank: 'The governance of companies is more important for world economic growth than the government of countries.'

This section will focus the connection between risk management and Corporate Governance. Corporate Governance and Risk Management are strongly linked and the two are used in conjunction with one another to help companies in the running of a smooth and well-organized business. One of the main reasons for the implementation of Corporate Governance is to stop Corporate Failings and Turnbull highlights that that drive the business forward, some risks should be taken (Chartered Institute Internal Auditors for UK and Ireland). And is said to calculate risks the use of risk management is essential because even the smallest risk can create big problem for companies.

CIMA (1999) explain number of factors which link Corporate Governance with Risk Management, good corporate Governance reduces risks. The purpose of the risk management is to eliminate risk. Risk Management as described by Coyle (2003/04) identifying, assessing and controlling the risks facing a business, and with incorporating risk issues into decision making processes (Coyle, B, P2). And if we compare the definition provided by the (Cadbury, 1992, Coyle, p4) The system by which companies are directed and controlled both the definitions aim to protect the organisation and their investor (equity or debt) and also ensure the smooth running if the organisation.

There have been many changes in issues Corporate Governance and Risk Management from the Cadbury Report of the early 1990s to the more recent Turnbull Report of 1999. Well it is now clear to all the boards of directors there responsibility to ensure that all possible threats to an organisation have been systematically identified, carefully evaluated and effectively controlled.

Corporate Scandals

The Corporate Scandals were occurring on a frequent basis in the 1980's - 1990's (The international Corporate Governance Review 2003). This was considered as a worrying condition for investors and companies. Short et al (1998) suggested that corporate scandals can occur for a number of reasons one of the reason given by them was creative accounting, which can explain as not doing the accounts properly and hiding the problems or risk through which the company is exposed. And the investors believe that company is performing and working in a good condition and there investment is safe. They also explained that dishonest of directors also played a vital part in corporate scandals, this can be in many ways such as hiding the fact and telling shareholder that the company is doing well.

Nathanson (2002) explain corporate scandals often have elements of political blame. Nathanson explain this by taking the example of Heath's Government in 1972 as they made a drive for growth. Which mean high share prices which affected the economy which was growing at round 5%. And some companies such as Slater Walker went bankrupt (Nathanson 2002).

One of the interesting question to analyse is How do (the suppliers of finance) make sure that managers do not steal the capital they supply or invest it in bad projects (Licht, 2003). To protect Investors is the overall main purpose of Corporate Governance and this statement shows the overall purpose for the Corporate Governance.

The scandals not only affected the shareholders of the organisation but it also harm the staff, usually financially. So the whole organisation was effected by the Corporate Scandals. One of the article printed in Financial Times in year 2002, which explain the former employee's pension which was previously worth $450, 000 is now worth $12,000, this is because of the collapse of the company, and financial time total blame corporate governance (Financial Times, 2002). This shows how the collapse of a massive company such as Enron can have on one individual employee. However we should also understand that shareholder are not only one who are affected by this disaster but it also affected such as the financial services market, a decline in confidence in the market, and the government as it is poor publicity.

(Market and opinion research International, 2003)

The figure 3.2 highlights that confidence in UK organizations is in-fact fairly high when comparing the above data it is clear that in-fact confidence is rather high with 47% disagreeing that an Enron could occur and 35% strongly disagreeing. But the fact is that only 4% of the directors who were interviewed believe that it was likely or highly likely. To conclude this, now the directors are confident after the effective corporate governance that there won't be another Enron Scandal occurs in the UK.

Maier (2005) suggested of the failure of the corporate governance is corporate scandal. And because of these corporate scandals investor loose there confidence over the market (Maier 2005). Because of these corporate scandal government introduce the Cadbury Report (1992) to increase the confidence of the investor (Cadbury Report 1992). The USA also acted in a similar way to the Enron scandal by introducing the Sarbanes-Oxley Act (2002). It appears that corporate scandals have many bad affects but they are a key driver for Corporate Governance.

Can directors be trusted to tell the truth?

Agree: 17%

Disagree: 65%

Are directors paid too much?

Agree: 75%

Disagree: 11%

Can firms' pension promises be trusted?

Agree: 34%

Disagree: 43%

Can accountants be trusted to check results?

Agree: 37%

Disagree: 39%

(BBC Business, 2002)

The above figure was taken from BBC business survey which was conducted in 2002 by surveying 2000 members of the UK public. The survey was conducted soon after the corporate scandals which were because of the failure of the Corporate Governance. When analysing the figure the general public of UK totally lost confidence from the companies and only 17% of the citizen respondents that they trust Directors.

So we can conclude by saying that corporate governance is a prime factor or this also be explain as a key element which not only enhance investors confidence but it also promote competitiveness and ultimately the whole economy benefits. 'The governance of companies is more important for world economic growth than the government of countries' (James Wolfensohn, President of the World Bank).

Cultural, political and economic norms affect the way in which a society approaches corporate governance and its affects on board leadership, management mistake and accountability. The challenge in front of the policy maker is to reach a balance of legislative and regulatory reform, taking into consideration the best practice to promote enterprise, enhance competitiveness and stimulate investment.


There are clearly many factors which act to provide incentive for institutions not to involve themselves in Corporate Governance issues. Whilst the level of monitoring by institutions is greater than that commenly supposed, such monitoring tends to be carried out in private, and, as Black and Coffee (1994) note, 'for most British institutions, activism is crisis driven'. Furthermore, it is unlikely that 'behind the scenes' monitoring is satisfactory, particularly from the point of view of the public, as it enhances the belief that institutions and company management are all simply part of the same 'old boy network', a belief illustrated by the debate concerning the high level of directors' remuneration. The increase in number of information's and guidance has increased the knowledge of the companies' and has also made the corporate practices more sophisticated. If we go through Cadbury committee report there was lack of internal control however Turnbull report lifted the veil and this report emphasized on internal control as part from other controls. Other countries such as the USA are different from Great Britain, the USA introduce Corporate Governance Legislation called the Sarbanes-Oxley Act. Although the United Kingdom do not have Corporate Governance legislation as such companies feel obliged to follow guidance if wish to attract investment (ICAEW, 2005).

Corporate Governance is very much important for these days for the companies who work either in public sector or private sector as it has been highlighted in previous high profile corporate scandals, such as Enron, that lacking of Corporate Governance companies are exposed to being involved in a Corporate Scandal (ICAEW, 2005). Corporate Governance is now becoming a culture of companies in Britain and it is more often used than ever before.

Large corporate scandals in the USA, such as Enron, have an affected other countries which also include the UK. Corporate Governance is closely linked to Risk Management; so it is essential to go through the key component in the risk management regime.

Chapter 2

Case Studies

In order to see the poor performance of Corporate Governance and lack of Corporate Governance legislation it is useful to use the case study approach. It was very important for the dissertation as it highlights the real life example of the poor performance of Corporate Governance. A case study can be defined as a research study which focuses on understanding the dynamics present within a single setting (Eisenhardt 1989, p65). This technique (Case Study) was introduced in 1934 as per the Oxford English Dictionary (2006). According to Stake (1993) the purpose of using two case studies was to see how the failure of corporate governance and there affect on the companies in different ways. One of the key objectives of including these cases is to see the affect of corporate scandals and how they can happen and this aim can be assisted by the case study technique. There are a many limitations however; the company scandals are in different sectors of the economy.

The approach of case study is having number of advantage and number of disadvantages as well. By using case studies, comparisons can be drawn, comparing one corporate scandal with the other company scandal (Jankowicz, 2005). It must be noted that when comparing the different corporate scandal they are often very different but the reasons of this occurrence are very much similar. Jankowicz (2005) also highlights that the case study approach is open research method, which can be change on a daily basis. This approach given by Jankowicz is different and difficult to understand as if the case study is changing constantly then it will be time consuming and the other can be possibly confusing. This was problem was solved by setting clear dates of data, to research and not add any irrelevant information or new information unless it was important. Another advantage of case studies is that real life examples support research findings.

The aim of this section is to include two corporate scandals as case study and to discuss why and how they have occurred. These case studies were particularly selected to evaluate and highlight the similarities and differences in the arena of corporate scandals in the UK and the USA. The two case studies chosen for this section are from Robert Maxwell (1989) and Arthur Andersen (1991).

Case Study one - Robert Maxwell

Ian Robert Maxwell was born on 6th October 1923 Ján Ludvik Hoch in the small town of Slatinské Dôly, Slovakia, (now Velyky Bychkiv, Ukraine) into a poor Yiddish-speaking Jewish family. He joined the British Army as an infantry private and fought his way across Europe from the Normandy beaches to Berlin. His intelligence and gift for languages gained him rapid promotion to captain, and in January 1945 he received the Military Cross. It was during this time that he changed his name to Robert Maxwell (

After the World War 2, Maxwell first worked as a newspaper censor for the British military command in Berlin in Allied-occupied Germany. Later, he used various contacts in the Allied occupation authorities to go into business, becoming the British and United States distributor for Springer Verlag, a publisher of scientific books. (

The Maxwell scandal was a pension scandal which occurred in 1989 in Great Britain. Robert Maxwell who actually owes the Mirror newspaper group defrauded more than 400 million of employees' pension funds (BBC, 2001). Maxwell fell to his death from his yacht in Spain (Picard, 1996).

Robert Maxwell was able to fraud the company as he was claiming that he actually owe the whole assets of the company, and he was claiming that he had more assets that he did and the some assets he claimed were not indeed his. The loss/deficit was covered by the pension scheme of the employees' from this organisation (Greenslade 1992).

Robert Maxwell issued a video in 1989 and he declared to his company employee's ''Your Pension is safe with me'' (Greenslade, 1992). This video was issued shortly before the Maxwell scandal was uncovered as he was trying to lye with his employee's.

Maxwell had already experienced much controversy in the years, which had led to the corporate scandal (Ipsen, 1991). The Department of Trade and Industry (DTI) declared him unfit to run any company twenty years before this scandal (Ipsen, 1991). DTI in 1969 actually declared Robert Maxwell unfit to carry any business activities and also declared him to perform such functions which involve any public fund. This was held when one of the renowned company of Maxwell 'Permagon' was in a process of takeover talk with Leasco who reported Maxwell inaccurate profit figures to the DTI (Thomas & Turner, 2006).

How could this have been prevented?

The scandal of Robert Maxwell occurred as Maxwell was the chairman and the chief executive of the Maxwell Corporation, which gave all the right and large amount of power in the absence of proper Corporate Governance (Maier, 2005). The Combined code recommends against this as it may be a conflict of interests (Combined Code, 2005). As Maxwell was performing the duties of Chairman and Chief Executive so it gave him too much power and it is possible that it was this power which allowed him to defraud his companies.

There was a different lack of Corporate Governance legislation or even guidance with the first piece not being introduced until 3 years later in 1992 by the Cadbury Committee (Untied Nations, 2003). The lack of guidance or legislation meant that Maxwell was in a position to defraud his employees by playing with their pension funds. Until then there were no specific guidelines to highlight how a company should be run and what are the duties of the directors or chairperson and because of this loophole he Maxwell fraud was not brought to light until it was too late.

Robert Maxwell company was listed in the stock exchange until the Maxwell scandal effected the organisation. However with Maxwell's employee's trusting him with their pensions this could have been one of the assurances which were given, had it been in place. To provide good internal control The Turnbull Guidance was actually designed and it also includes Risk management (ICAEW, 1999). The key failings of the Robert Maxwell scandal were internal control, as no other directors reported what Maxwell was up to, and conflict of interests with Robert Maxwell was the chairman and the chief executive (Maeir, 2005). The internal control failures of Maxwell were vast. Firstly Maxwell employed his son's as non executive directors, when non executive directors are meant to be independent (Maier, 2005). Secondly Maxwell was able to hide these massive debts without anybody realising, which section 4.28 of the Combined Code (1999/2005) aims to eradicate. The fact that Maxwell had already been exposed as being unfit to run a company, employees still trusted him with their pension premiums. However employees may have had little choice if this was the only pension scheme available to them.

According to Wheen (2001) the auditors of Robert Maxwell's business empires, should have seen what Maxwell was up to. The combined code also concentrates on auditing and if this guidance had been in place perhaps the scandal may never have occurred.

Impact of the Robert Maxwell scandal?

One of the affect of the Maxwell scandal was that employees who were contributing into the pension scheme lost there money, which were contributing over the years. This is really a main focus point that the ordinary workers lost there saving which was for there benefits and it was because of the dishonest actions of one individual.

The impact of the Maxwell scandal was also on the British economy and was vast and it put increasing pressure on the Department of Work and Pensions who wrote advice which suggested that occupational pensions schemes were safe (Abraham, 2006). However the Maxwell scandal highlighted the risk to every occupational pension.

Case Study Two - Arthur Andersen?

Arthur Andersen LLP, based in Chicago, Illinois, was once one of the Big Five accounting firms in the United States of America with revenue reaching $9.3 billion (Brown & Dugan, 2002), performing auditing, tax, and consulting services for large corporations. The firm of Arthur Andersen was founded in 1913 by Arthur Andersen and Clarence DeLany as Andersen, DeLany & Co. The firm changed its name to Arthur Andersen & Co. in 1918 (

Arthur Andersen was working for a big energy giant called Enron Corporation which is an American energy company based in Houston, Texas, United States when they were exposed of a massive corporate scandal (Deakin & Konzelman, 2004). Arthur Andersen were convicted in the supreme court, Houston, of shredding important documents of Enron and destroying emails from Enron, which would have involved them in Enron's corporate scandal (Economist, 2005).

Arthur Andersen were the accountants for Enron and they were accused of accounting irregularities and a lack of transparency (Uma et al, 2002, p77). Nancy Temple (Andersen Legal Dept.) and David Duncan (Managing Director for the Andersen Houston Office) were cited as the responsible managers in this scandal as they given the permission to shred relevant documents. Since the U.S. Securities and Exchange Commission does not allow convicted felons to audit public companies, the firm agreed to surrender its licenses and its right to practice before the SEC on August 31 (

Arthur Andersen were hired to ensure that the accounts of Enron were correct and valid and they were convicted because they did not ensure this and also because they tried to cover up their lies by shredding documents. Arthur Andersen were first employed by Enron as consultants and then employed as auditors which the SEC (Securities and Exchange Commission) felt were a conflict of interests (Goldstein, 2002). Kadlec (2002) further explains that Arthur Andersen made massive mistakes in the Worldcom scandal and it also appears that auditors Arthur Andersen missed two cases of fraud in Worldcom. This was the bad publicity, which Andersen could have done without as it closely followed the Enron fiasco.

On the 10th January Andersen admitted that they shredded important documents and emails regarding Enron which would have incriminated them (Sridharan et al 2002). This was extremely shocking for the economic world including many auditors, as it was their job to catch out accountancy fraud and mistakes, not to assist companies in committing such crimes.

Arthur Andersen, much like Robert Maxwell were no strangers to controversy. Andersen had experienced a turbulent past leading up to the Enron and Worldcom scandals (Gredier, 2002). They were connected with the Sunbeam scandal in which the Securities and Exchange Commission ordered them to pay $110 million compensation and also the Lincoln savings and Loans Company (Gredier, 2002). The fact that Andersen had been involved in trouble in the past raises a few questions like why did companies continue to use them as auditors?

How could this have been prevented?

One of the policy of Arthur Andersen company was to employ cheaper and less experienced staff and one policy was that senior employees will retired at the age of 56 in order to save money (Brown & Dugan, 2002). There was now drawback for this policy, this policy may have been financially sensible it did mean that experienced staff were being replaced with inexperienced staff, which is a risk for any business.

The Enron fiasco was not the only case with Andersen there was many other case such as Worldcom scandal (Kadlec, 2002). Enron had already been caught up in a similar corporate scandal and companies like Enron continued to use them. Also the fact that the directors of Andersen did not act upon previous mistakes, these mistakes continued to happen. Again the role of Corporate Governance would have played an vital role, however it is difficult to analyse how anybody could have stopped employees from shredding documents. The directors of the company were essentially to blame as they should have known what was happening in their own company. This type of practice is one that is unpredictable however it is largely contributed to the downfall of Andersen.

In a strange turn of events when the Enron scandal was made public Andersen were actually auditing the FBI (Federal Bureau of Investigation) for the government according to Senator, Patrick Leahy (2002), who was the chairman Judiciary Committee.

Impact of Arthur Andersen

Arthur Andersen once employed 85,000 employees however now they only employ 200 employees who only look after legal claims following the scandal which ruined the company (Wall Street Journal, 2005).

The corporate scandals which Andersen were involved in cost them dearly as highlighted below in some of the compensation claims:

Waste Management 75,000,000.00

Sunbeam 110,000,000.00

Boston Market Bankruptcy 10,300,000.00

Baptist Foundation, Arizona 217,000,000.00

(Wall Street Journal, 2002)

The figure highlights some cost associated with Arthur Andersen incurred through corporate scandals in which they had some degree of blame. The estimated cost of these four corporate scandals was $412.3 million Wall Street Journal, 2002. These figures do not show the figures including Enron but these other corporate scandals were deemed to be smaller and the cost of corporate scandals is here.

The Sarbanes Oxley Act (SOX) (2002) was introduced in direct response to a number of corporate scandals, namely Andersen/Enron (Economist, 2005). This response was similar to the UK's response to Maxwell and Polly Peck, The Cadbury Report (1992) however the Sarbanes Oxley was legislation which meant companies had to follow the Corporate Governance Guidance set out in SOX (2002).


These two companies experienced different types of corporate scandals. The two comparisons chosen are quite different but this highlights the fact that corporate scandals can happen to any business.

There was a degree of dishonesty in both the Andersen and Maxwell scandals, with Robert Maxwell being dishonest and employees and directors being dishonest for Andersen. This dishonesty was at the source of both scandals with Maxwell lying about how many assets he had and Andersen shredding documents which would have incriminated them.

There was also conflict of interests in both cases. Robert Maxwell was the chief executive and the chairman (Maier, 2005) and in Andersen they were consultants to Enron before being their auditors (Goldstein, 2002). This meant that in the case of Maxwell he had too much power and in the case of Andersen they had worked for Enron in a different capacity which means that they were no independent, they knew about the inside affairs of the company.

These scandals occurred when there were no proper corporate governance legislation / guidance. The first piece of Corporate guidance was not introduced in the UK until 2001, which was the Cadbury Report (Cadbury Report, 2002) and the first piece of Corporate Governance legislation was not introduced to the USA until 2002, The Sarbanes-Oxley Act (2002) (Sarbanes Oxley Act, 2002). This meant that these two companies had no guidance/legislation on Corporate Governance, which meant they could choose how their companies were run.

One of the key failures in both corporate scandals was internal control. Andersen was also involved in a number of corporate scandals and nothing was done within the company to stop these from occurring. Both of the above corporate scandals had a positive impact on corporate governance with Andersen leading to the Sarbanes-Oxley Act and Maxwell largely contributing to the Cadbury report.


Corporate scandals have had devastating affects on companies, in Andersen's case the massive fines and loss of business activity. However corporate scandals have benefited corporate governance as the Cadbury guidance was implemented in response to corporate scandals such as Polly Peck and Maxwell (Cadbury, 2002). In the United States the Enron scandal led to the implementation of Corporate Governance legislation.

Although both Andersen and Maxwell had an extremely negative affect for many reasons there was one key positive to be deduced which was they both improved corporate governance.

Chapter 3


The purpose of the project undertaken is to analyse the issues in Corporate Governance and the Corporate Scandals. A thorough literature review has been taken into consideration in order to come with a conclusion. The initial part emphasise on different authors' research having different Corporate Governance disciplines. One of the main topics discussed was of the development of Corporate Governance and the stages involve in it.

The history of Corporate Governance is dated back to 1920's, when the running of business was debated by to American's (OECD, 2004). It began with a single document i.e. Cadbury Report, on a later stage it was followed by a number of others that were Greenbury (1995), Turnbull (1999/2005) and Combines Code (1998/2003). It started on a narrow scale having various disciplines of Corporate Governance in individual documents. Then there was an introduction of the Combined Code in (1998/2003), the purpose of which was to guide the organisations through one document incorporating good leadership in them. To assist the companies in their internal control section of the Combined Code, the Turnbull Report was introduced. Corporate Governance has become a hot topic in debates over the number of years having a turning point by coming in the UK listing rules in 1998 (FSA, 2003), which abide companies to disclose what procedure are they following or whether or not they follow the combined code. This disclosure of codes push the companies into trouble if they are not applying as the chances to have less investments were there and vice versa. The Combined Code was a assurance for investors that the company is run honestly and efficiently.

The last decade of twenty first century has given a rise to Corporate scandals with examples in the UK being Robert Maxwell and Polly Peck, in USA as Enron and Shell (Parkinson & Kelly, 1999). Due to these scandals the investors' security and trust was lost from giant organisation as their investment was vulnerable at such places. UK established the Cadbury Report (1992) when acting upon the bad publicity of Corporate scandals and USA introduced the Sarbanes-Oxley Act (SOX) (ibid).

The link between Corporate Governance and Corporate thus, is very strong. The above scandals in UK and USA were happened due to a lack of control. Therefore, Corporate Governance provided the necessary controls on the organisation to avoid any mishap and give the investors assurance that their investments are safe and in a growing place.


The limitation when handling the issue of Corporate Governance in this report were mainly due to the different aspects of the subject area, as different authors have different views and everybody's opinions are subject to bias. This was mainly overcome by sticking to the guidelines provided in the aims and objectives of the report. The time duration to complete this report was also a matter due to a large amount of literature document was to be undertaken. The deadline outlined by the University authorities was strict and the work was expected to be précised. These limitation were eliminated by setting up deadlines, for number or weeks to ensure some productive result.


The objectives of the report were attained by analysing different literature and theoretical background of subject matter. The case studies involved in the report allowed a solid background of examples of two companies who already have experienced Corporate scandals. Both are different from each other, Maxwell is a publishing company and Andersen is in auditing business. But a number of reason from both the failures pointed out were similar. The internal control and dishonesty were mainly lacking in both the cases.

These and other such failure has led the intervening organisation to change the ongoing system to maintained trust and honesty, thus Corporate Governance is changed now and is evolving into a better shape. The combined code of Corporate Governance (1998/2003) and The Turnbull Guidance (1999/2005) are now in place as two concise and informative documents. USA has introduced in the legislation for companies to be enforced by Corporate Governance but in UK the companies on the stock exchange has to declare where they are complying with it or not.

The Cadbury Report (1992) was implemented as the direct response to corporate scandals, which were highlighted through the introduction of Corporate Governance Guidance. The negative effects through Corporate scandals were so many from which the main were job losses and shareholders trust loss but these were also the main idea for intervening the organisations with regards to Corporate Governance.


The discussion on Corporate Governance is widespread in around every country disregards of it is developed or developing. However, there might be different methods of having a check and internal control on different companies in different states due to the countries economic policies as Russia and China are following a different economic ideology as compared to USA and UK. The comparison between these two ideological background of internal control could be useful in line with further changes and evolution to Corporate Governance.

Since past fourteen years, Corporate Governance has evolved a lot, when the Cadbury Report was introduced and for further research, it could be a worthwhile project to analyse corporate governance changes in these years.


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