Why Traditional Corporate Governance Implementations Fail and Lack Sustainability

MIRAMAR, Fla. - March 27, 2014 - PRLog -- The collapse of high-profile international businesses, giant banks and mega-multinational companies over the past several years, the recent unprecedented worldwide financial crisis, the power shift from public to private sector through converting state-owned enterprises to joint stock publicly-owned companies, the transfer of technology, and globalization are compelling reasons for good corporate governance practices to be applied. Large-scale accounting scandals that brought trouble to many large companies are often caused by unethical behavior of top-executives. Poor ethical leadership, lack of integrity, mismanagement, fraud, corruption, and violating corporate governance rules are the main contributors towards bankruptcy and financial failures.

The human element represented by the directors and employees is the major cause of these failures. Especially unethical behavior of leaders is the main cause of bankruptcy and financial failures. Remember what Alan Greenspan, Former Chairman of the Board of Governors of the US Federal Reserve System, said: “Our market system depends critically on trust—trust in the world of our colleagues and trust in the world of those with whom we do business…. I am saying that the state of corporate governance to a very large extent reflects the character of the CEO.” Therefore, the corporate governance codes around the world should strongly advocate a focus on personal integrity development within organizations.

Many governments and large companies everywhere are currently very keen to revamp, develop, and implement a corporate governance code to address the above mentioned shortcomings. Unfortunately, all these codes are cosmetic and not sustainable. All these codes do not provide adequate protection. For example, top executives in Europe and the USA found easy escape routes to misinterpret their code and increased their salaries significantly.

The situation at JPMorgan Chase, the world's largest bank, early this year is an interesting case with regard to corporate governance. Government investigators have recently found that JPMorgan Chase devised “manipulative schemes” that transformed “money-losing power plants into powerful profit centers,” and that one of its most senior executives gave “false and misleading statements” under oath. JPMorgan executives also ignored a series of alarms that went off as the bank’s Chief Investment Office breached one risk limit after another. Rather than ratchet back the risk, JPMorgan personnel re-engineered the risk controls to silence the alarms. In a previously undisclosed case, prosecutors examined whether JPMorgan failed to fully alert authorities to suspicions about Bernard Madoff. And nearly a year after reporting a multibillion-dollar trading loss, JPMorgan did face a criminal inquiry over whether it lied to investors and regulators about the risky wagers. This case pinpoints that JPMorgan’s corporate governance code and exhaustive regulations do not provide adequate protection. A recent study conducted by Labaton Sucharow, a New York City law firm, suggested that Wall Street still has a shaky grip on its ethical compass. Despite the financial changes enacted after the 2008 financial crisis, improper and even illegal activity is perceived as common among traders, brokers, portfolio managers, and bankers.

Some other examples: a) US Treasury estimated that if Apple had more honestly assessed what percentage of its profits were generated by its U.S. operations, it would have owed $2.4 billion more in federal taxes last year; b) Wal-Mart’s often criticized treatment of employees as a commodity and its sometimes inhuman business ethics; and c) Chevron has been accused of tax evasion as well a number of environmental infractions in several countries and hiring military force for use on native peoples.

All the above mentioned organizations have comprehensive corporate governance codes in place, implemented by the left brain Big Four accountancy firms (PwC, KPMG, Ernst & Young and Deloitte), which apparently are not working at all. Unethical behavior of top-executives, poor ethical leadership, lack of integrity, mismanagement, fraud, corruption, and violating corporate governance codes are the main contributors towards most of these scandals.
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This article is based on Hubert Rampersad’s latest book “Authentic Governance; Aligning Personal Governance with Corporate Governance” (Springer USA, New York, 2013). He is Chairman of the Authentic Governance Institute in Florida.

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