The corporate structure

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"A great business is really too big to be human" - by Henry Ford. However, the purpose of the "Corporate Structure" is to surpass the ability and lifespan of each individual. The effects by humans in directing and controlling other humans, either through democracy or fascism, have been notoriously unsuccessful. Efforts by humans to control institutions are even greater challenge.

There are various definitions that circle around few parameters that are useful in telling us about the aspirations and assumptions of the people who suggest them. Like, some say it with admiration. According to Ayn Rand, "Capitalism demands the best of every man-his rationality and rewards him accordingly, Where every individual gets to choose the work they like, to specialize in it or as to go as far on the road of achievement as their ability and ambition will carry them". (Monks & Minow, 2008:11)

"Many believe that robust systems of corporate governance are important for both large and small organizations". However, this discussion is designed to explain "why corporate governance codes and regulations are thought widely to be essential in Modern Business Life". (Wearing, 2005)

Arguments have been made whether a company to allow one person to hold the positions of Chief Executive and Chairman at the same time. There are more than "1,500 out of the largest 3,300 publically traded companies have separate CEO and Chairman". According to data collected from "The Corporate Library" (Monks & Minow, 2008).

The Combined Code on Corporate Governance in the UK and Sarbanes-Oxley Legislation in the US, are arguable "Whether these codes and regulations can ever be sufficient on their own to take on weak Corporate Governance, suggestions that a change in business culture is required"( Wearing, 2005).

Mr. Adrian Cadbury states that, "The independent board director makes a thoughtful and readable contribution to the growing literature on corporate governance". Independence is a matter of character, although reasonable direction on what comprises independence is set out in the independent board director".

To have an independent board director, some "useful pointers" where boards can add more value to their companies and also to their members. The directors should have sufficient knowledge about the workings of their companies to be answerable for their activities, whilst standing behind their day-day management to retain their objectivity. The directors should "look inwards at the business for which they are responsible and at their less well-defined responsibilities to society".

"A means to that end is a balanced board. It is the haphazard way in which too many board of directors are formed which makes the message of the independence board director so important" (Clutter buck & Waine, 1994)

Corporate Governance Codes

Combined Code UK:

Good Corporate Governance produces good corporate performance. After the widespread of "multi-country corporate governance failures like Enron in the US and Maxwell, BCCI , Poly peck in the UK, Parmalot in Italy and Ahold in the Netherlands, the critics have demanded for company law reforms and better corporate governance practices". Few countries have reacted with strict regulations like the Sarbanes-Oxley Act in the US and The Combined Code UK (Bruno & Claessens, 2009).

In May 1991, The Cadbury committee was appointed by the "Conservative Government of the UK" to address the financial aspects of Corporate Governance. Sri Adrian Cadbury, CEO of the Cadbury Empire, was the Committee Chairman and included the rest senior industry executives, finance specialists and academics. "In December 1992, the committee issued its report, The Code of Best Practice". The two recommendations of the code are that boards of publicly traded companies include at least three non executive directors and at the positions of Chief Executive Officer and Chairman", this will be held by two different individuals.

The code came into existence, as response to a many corporate scandals that doubted on the systems for controlling the ways companies run. After the downfall of the powerful people like Asil Nadir or the late Robert Maxwell, BCCI or Poly Peck (Dahya et al, 2002).

" The Greenbury committee was formed after widespread public concern over what were seen as excessive amounts of remuneration paid to directors of quoted companies and newly privatized companies" ( Wearing, 2005:18).

According to Greenbury's report, UK companies deal with directors' remuneration in a responsible way. Some specialists have advised that the most part of the remuneration levels for directors in the UK lie between the limit of European practice and below American levels.

Greenbury's report also believes that UK's industrial performance has improved greatly in recent years. However, the performance of the company depends on the directors and senior executives who lead them (Greenbury report, 1995).

The Greenbury reports issue is that the compensation of payments to directors on loss of office has been a cause of public and shareholders' concern. Several criticisms have been directed at the scale of some of the payments made and at their payment, lack of justification in terms of performance. Few of the payments have been described as "rewards for failure" (Greenbury Report, 1995:45).

In 1995 Hampel committee was formed to review implementation of the findings of the Cadbury and Greenbury committees. The Hampel committee published its reports in 1998. Most of the recommendations in the earlier reports were then published in 1998 by the London Stock Exchange as The combined code: Principles of good governance and code of best practice (Wearing, 2005:19).

The Higgs review and Smith report published in the year 2003 by the UK government, Derek Higgs had been commissioned to review the role and effectiveness of non-executive directors, by following the financial scandals including Enron and WorldCom (Wearing, 2005:19). Higgs' as reviewer were to build and publish an accurate picture of the status quo; to lead a debate on the issues, mainly the business and financial worlds; and also to make recommendations to government (Jones, 2003). Also, the Smith report prompted by the Enron and WorldCom scandals and the working party provided guidance on audit committees (Wearing, 2005).

Higgs review commissioned three strong pieces of primary research. Firstly, a detailed study on the size, composition and membership of the board and committees, and the age and gender of their directors. Secondly, 605 executive, non-executive directors and chairman of UK listed companies and finally, after some interviews with over 40 directors (FTSE 350 boards) the research analyzed the behaviors that promote effectiveness and looks in detail at behavioral dynamics inside and outside the boardroom.

Also, among the controversial proposals the limitations that would be held on the number of chairmanships could be held by one individual, be available to shareholders and the limits on non-executive director tenure. Higgs also recommended that the financial reporting council and Financial Services Authority process his reviews proposal's rapidly. Debate which followed the publication of the review "became extremely heated". The ICEAW noted that while the Cadbury, Greenbury, Hampel and Turnbull produced 14 reports and 45 code points and the Higgs review added just 1 principle however, 37 additional code points.

"Higgs and Smith presented their proposal on many occasions following the publication of their reports". The CBI surveyed 61 FTSE100 chairmen, 82% of the company's chairman agreed that the senior independent director undermined the role of the chair and 87% did not (Jones, 2003:8).

Sarbanes-Oxley US:

"After the spectacular crashes and frauds of the US companies like Enron, WorldCom triggered a re-evaluation of legal rules intended to curtail fraud" (Ribstein, 2003). In 2002 Sarbanes-Oxley Act came into existence. "Paul Sarbanes, a democrat senator and Michael Oxley a republican congressman, were responsible for a piece of corporate legislation". (Wearing, 2005:21).

G.W. Bush signed the public accounting reform and investor protection act (Sarbanes-Oxley act) into law on July 30, 2002. The Act provisions five main points:

Firstly, SOX expects CEOs and CFOs to certify firm's financial reports, which demands more timely and extensive financial disclosures.

Secondly, SOX expects all public companies to establish and maintain an internal control system for financial reporting.

Thirdly, SOX sets stringent standards for audit committee membership.

Fourth, SOX affects the ability of corporate insiders to earn profits from trades of the firms' shares.

Finally, SOX defines some new criminal offenses and increases criminal penalties attaching to the existing offenses (destruction of documents) (Engel et al, 2006).

According to SOX act, there are penalties for directors and professionals who have conspired to commit fraud. Some examples which follow as:

"Section 906 of the Act requires that all periodic reports containing financial statements filed with the SEC must be accompanied by a written statement by the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) of the company, certifying that the report fully complies with the Securities Exchange Act and fairly presents, in all material respects, the financial condition and results of operations. The penalties for knowingly certifying a statement which does not comply with the requirements can be severe: up to $1 million in fines and/or up to ten years' imprisonment.

Section 1102 provides that 'knowing and willful' destruction of any record or document with intent to impair an official proceeding carries fines and/or imprisonment up to 20 years. Section 806 provides protection for employees who provide evidence of Fraud. There is also protection for 'whistleblowers' in publicly traded corporations. No company, officer or employee may threaten or harass an employee who reasonably believes that a criminal offence has been committed.

Section 501 of the legislation also aimed to promote rules to address conflicts of interest where analysts recommend securities when their companies are involved in investment banking activities. The Sarbanes-Oxley legislation also established a Public Company Accounting Oversight Board (PCAOB) to be responsible to the Securities and Exchange Commission (SEC) for the regulation of auditing in US companies, inspection of accounting firms and disciplinary proceedings.

As a result of the Sarbanes-Oxley legislation, some companies felt that the burden of compliance was too high in relation to the perceived benefits. Companies were reported to be spending 'millions of dollars revamping their internal controls, updating compliance regimes, writing codes of ethics, setting up hotlines for internal complaints, writing governance principles and board committee charters. They are paying auditors and lawyers greater fees, as well as directors'.4 The chief executive of the New York Stock Exchange (NYSE), John Thain, argued that the additional burden of compliance was dissuading foreign companies from listing on the NYSE"(wearing,2005:21).


As per the study the UK and US share many similar things such that, people often follow "Anglo-US model". However, when it comes to separating the roles of CEO and Chairman the model is completely different. About 95% of the UKs company (FTSE 350 companies) stick to the principle that the roles should be separated. In the US, nearly 80% (S&P 500 companies) combine those (Coombes & Wang, 2004:43).

Having separated the role in the UK and other that follow the idea of separation constitutes an "Indispensable component" because the tasks of the CEO and Chairman are different. The CEO runs the company and the Chairman runs the board. However, if the CEO and the Chairman are the same person it will be difficult for the board to criticize the CEO or to express independent opinions (Coombes & Wang, 2004:44).

Considerable attention have been paid by the 'Financial Economists' to the role of chairman in internal corporate governance, focusing mainly on their role in "monitoring managers and in removing non-performing CEOs" ( Goyal & Park, 2001). Jensen commented on board's effective role and claims that "Internal control mechanisms are rather weak for disciplining poor managers". However, Jensen's concern is that the lack of independent leadership, which makes it "extreme, difficult for the board to respond early to failure in its top management team". (Jensen, 1993:866).

According to Goyal and Park (2001:50) "The lack of separate leadership in a firm with a single chairman/CEO reduces monitoring by the boards and makes it difficult for the board to replace a poorly performing CEO and the turnover is likely to be less sensitive to performance in a firm with a combined CEO/Chairman position than in firms with two separate positions".

For Example, many of the US companies failed and the commentators complained that the boards of directors did not provide enough discipline being as top managers. As Briekley mentioned in his paper that, Benjamin Rosen, chairman of Compaq computers, voiced this concern;

"When the CEO is also chairman, management has de facto control. Yet the board is supposed to be in charge of management checks and balances have been thrown to the wind".

Several criticism have been made on this issue and according to The United shareholders association and several large public pension funds have sponsored shareholders proposals at sears Roebuck and many others calling for the separation of the CEO and Chairman titles. Mary Shapiro, SEC commissioner spoke in favor of the UKs takeover board that the positions of CEO and Chairman be separated in respect to "lessen the power of the chief executive over outside directors". In a Edward Markey subcommittee hearings he mentioned that "corporate governance bill to be considered, while on other structural board reforms, requiring the board chairman be independent on the circumstances in which a corporations CEO can serve as chairman" ( Birckley et al, 1994:190).

As Birckley (1997:200) says that, Rechner and Dalton (1991) examines that 141 firms have stable leadership pattern over the period 1978-1983 where the titles are combined or separated. However, according to that sample, 21.3% of the firms separate the titles, where 78.7% have each individual having both titles. Pi and Timme (1993) examined, say that over 25% of the firms have separate titles, while 75% have combined titles in banking sector (Brickley et al, 1994:192).

According to Jensen in one of his presidential address to the American Finance Association suggests that the firms to separate two titles (p.36).

"The function of the chairman is to run board meetings and oversee the process of hiring, firing, evaluating and compensating the CEO. CEO cannot perform this function apart from his or her personal interest. It would be difficult to perform the critical function without the direction of an independent leader. So, for the board to be effective, it is important to separate the CEO and chairman positions (Brickley et al, 1994: 193).

Weighing the arguments for separating these roles is more convincing because the separation gives boards a structural basis for acting independently and makes boards more effective. However, an independent board will not be necessarily practice that independence: few firms with a separate CEO and Chairman have failed miserably to carry out their oversight functions (Coombies & Wang, 2004: 46).

Before corporate governance became such a mainstream concern, 50% of the companies in the Times of London's top 1,000 UK companies had already divided the two positions. Because of scandals like 9908Poly Peck and Coloroll, Cadbury code came into existence in 1992 of the best practices." In the UK the separation of CEO and Chairman Post is recognized and respected". Perhaps, in the US, because of a higher correlation between prestige and remuneration, chairmanship holds less prestige and moreover in the US for top executives to undertake public service commitments either during their business careers or when they retrieve (Coombies and Wang, 2004: 47).

"In a much heard coup at General Motors in November 1992, the Board of Directors radically restructured the role of CEO's, closing GM's historical combination of the roles of CEO and board chair. John F. Smith, a GM officer of long service, became chief executive; John G. Smale, GM board member and former chair and CEO of Procter & Gamble Co., was installed as board chair. The board believed that this strange structure may facilitate GM's recovery at the period when losses had reached $7.5 billion. Smith would manage the company on a day-to-day basis while Smale would hold GM executives closely to account".

"However, others are apparently not convinced of the need to formally separate these positions. While it is true that other major corporations (e.g., American Express, Kmart, Morrison Knudsen, TWA, Westinghouse) have also recently split the CEO and board chair roles. Louis V. Gerstner of IBM and Lawrence A. Bossidy of Allied Signal insist on having both the CEO and board chair titles prior to accepting their role. Few executives view the separation of these roles as an emergency measure to be instituted only as a temporary condition for financially troubled companies. For example, that both American Express and Kmart recombined the CEO/board chair positions. Leslie Levy, of the Institute for Research on Boards of Directors, had made some remarks that, "Most separate chairmen are named during times of stress for the corporation, and with a limited tenure." It is significant that GM's experiment with the separate structure lasted only three years. One of Smale's accomplishments as chair was to supervise the adoption of an extensive set of governance guidelines that provided for the appointment of a so-called lead director, selected from among the ranks of outside directors, for those occasions when the CEO also served as board chair. On January 1, 1996, CEO Smith assumed the board chair position. GM thus confirmed Levy's observation that separate board leadership structure is rare and largely relied on only in specialized circumstances. "We know of no certain case where a large U.S. corporation has used a separate chairman other than on a transitional basis." (Daily & Dalton, 1997: pp 11-20).

Although there were some critics on the basis for Polly Peck's share price movements, during Polly Peck's peak time - seemed to be in a small minority. "Barchard (1992: 255) refers to one Swiss shareholder in Polly Peck who recalled being laughed down by other investors when he questioned the treatment of foreign exchange losses at an annual general meeting".

Gwilliam and Russell believe that financial analysts were insufficiently critical of Polly Peck's financial statements and argue (1991: 25) that 'a significant proportion of analysts either did not dig sufficiently deep into the disclosed information or failed to understand its importance'. They comment on the fact that Polly Peck held monetary assets in Turkey and northern Cyprus in a depreciating currency, the Turkish lira. In this situation, holdings in the local currency would be subject to exchange losses over time as the Turkish lira depreciated against the pound sterling.

However, a depreciating currency, by its very nature, will also be associated with high levels of interest on deposits (as compensation for the depreciating currency). Gwilliam and Russell also refer to the fact that in 1989 Polly Peck's interest received was greater than interest payable, a surprising result since at the beginning and end of the financial year monetary liabilities exceededmonetary assets. The relevant UK accounting standard, SSAP 20, Foreign Currency Translation (ASB) allowed foreign exchange losses to be taken to reserves, rather than be deducted from profit in the profit-and-loss account.

But a case could be made for charging foreign exchange losses directly to the profit-and-loss account. Nevertheless, full information was provided in Polly Peck's accounts through the notes. As Gwilliam and Russell (1991:25) state, 'Polly Peck's accounts were full of danger signs. So why did the analysts still say "buy"?' The fact that Asil Nadir was both chairman and chief executive of Polly Peck was also a cause for concern. The concentration of too much power in the hands of one individual may have meant that important decisions were not fully discussed by the board of directors. Hindle (1993: 153) states that in 1990: The reality was that Mr Nadir was juggling with so many balls at the time that he did not have the capacity to watch them all with his usual intensity. Superior information and a hands-on will to succeed had always been at the heart of his commercial successes. Now he was sometimes not getting the information, or not absorbing what he was getting.

In February 1991, an auction of furnishings at the London headquarters of Polly Peck, in Berkeley Square, raised about £3m. It was reported that Nadir had invested heavily in 18th-century English furniture and had spent about £7m on the Polly Peck corporate collection.16 It has to be wondered whether such expenditures were of benefit to Polly Peck. Could they have been used more profitably elsewhere in the group? Finally concerns have been expressed in the media17 about the legal process following Asil Nadir's arrest in December 1990 and the length of time it took for the UK authorities to bring the case to trial. Initially, Nadir was charged with 59 counts of theft and false accounting, but in 1992 a judge threw out 46 charges, leaving 13 charges relating to £31m. When Nadir fled in May 1993, two and a half years after Polly Peck collapsed, the trial had not yet started and Nadir was under quite restrictive bail conditions.It is perhaps not surprising that he became impatient with the delays in the legal process. What is clear is that until the legal process can resume, there will be no definitive answer to many of the issues surrounding this complex affair. (Wearing, 2005:51)

WorldCom represents a fascinating case study since it encompasses a story of massive wealth accumulation based on the telecommunications and internet boom of the 1990s. If the telecommunications and merger boom of the 1990s had not ended so suddenly, there is some justification for believing that WorldCom might have weathered the storm and carried on. As WorldCom's business declined in 2001 and 2002, Sullivan shifted some expenses from the profit-and-loss account to the balance sheet, thereby showing improved earnings. It seemed that this was a desperate measure, perhaps seen by Sullivan as a temporary measure, to try to prevent or delay WorldCom's bankruptcy.

According to the President of the Institute of Chartered Accountants in England and Wales in 2002: There is no systemic failure in this country in financial reporting, auditing or corporate governance. (Peter Wyman, ccountancy, July 2002: 124) But Beth Holmes - in her article 'WorldCom: could it happen here?' (Accountancy, August 2002: 18-19) - makes a number of interesting comments. She argues that Peter Wyman is complacent in arguing that scandals such as Enron and WorldCom are unlikely to happen in the UK. Perhaps the UK has simply been lucky in avoiding such major scandals. After all, Maxwell, Polly Peck and BCCI all occurred in the UK over a decade ago and it could be argued that similar episodes could happen again because little radical change has taken place in UK corporate governance in recent years.

There is little doubt that employees and shareholders lost out as a result of WorldCom's bankruptcy. Creditors were also disadvantaged. One might also think that the banks that made large loans to WorldCom would also have suffered. Interestingly, Partnoy argues that the banks who lent to WorldCom were effectively insured against the bankruptcy because they had used credit derivatives to hedge their lending risk: Banks had done an estimated $10 billion of credit default swaps related to WorldCom. That meant that even though banks still held loans to WorldCom and were owed money in WorldCom's bankruptcy proceedings, they had sold the risk with those loans to someone else. The banks didn't have to worry about WorldCom's bankruptcy, because whatever they lost on WorldCom's loans they made up for with credit default swaps. Whatever happened, they were hedged. (Partnoy, 2004: 375-6)

By the end of 2002 it was hoped that, with the appointment of Capellas and a new management team, WorldCom would be able to re-establish itself. The company emerged from bankruptcy in May 2004 and the name 'WorldCom' has now been dropped in favour of MCI. There have been several prestigious appointments to the board in order to enhance the company's credibility. For instance, Nicholas Katzenbach (a former US Attorney General) was appointed chairman of MCI and Dennis Beresford (former chairman of the Financial Accounting Standards Board) was appointed a director. Although MCI was reporting losses by the end of 2004, there were expectations that the company had a reasonable chance of operating profitably.( wearing, 2005:93)


Most British companies separate the roles of CEO and Chairman. The former runs the company, the latter runs the board and the two directors interact to a certain extent. Detailed information on the dismissal events points to the fact that Chairman replacement enables changes in board composition, including the appointment of a new CEO with a different set of skills. These findings help us understand the implementation process of corporate and board restructuring. Chairman departure at the time of CEO dismissal enables changes in the top management team, which may promote changes in future corporate decisions.

However, we can see two main strengths. Firstly, a distinguishing governance feature of UK firms, i.e. the separation of the CEO and Chairman positions, to explore the implications of CEO departure for the Chairman's tenure. Secondly, it strictly classifies the turnover events into forced and non-forced as well as employs a number of detailed data on the turnover process of the top two directors, where it allows more complete rendering of the findings ( ).


  • BE156 - Cases in Corporate GovernancePage 2