Corporate Governance: Financial Markets and Case Analysis

This report provides a comprehensive overview of corporate governance, defining its framework and role in financial markets. It identifies key factors indicating strong corporate governance, such as a qualified board of directors, effective performance evaluation, and a robust risk management framework. The report analyzes the failures of Fuji Xerox, detailing accounting manipulations and governance issues, and examines the collapses of Enron and Satyam Computer due to poor corporate governance. The report concludes by exploring the incentives behind financial information manipulation, such as stock price impacts and management compensation structures tied to earnings, and the influence of debt levels.

Running head: CORPORATE GOVERNANCE
Corporate Governance
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Requirement 1..............................................................................................................2
Requirement 2..............................................................................................................2
Requirement 3..............................................................................................................3
Requirement 4..............................................................................................................4
Requirement 5..............................................................................................................5
Requirement 6..............................................................................................................6
References...................................................................................................................7

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Requirement 1
Corporate Governance can be considered as the framework that includes
certain rule and practices used by the boards of directors to ensure fairness,
accountability and transparency in the businesses for maintaining strong relationship
with their key stakeholders such as investors, employees, customers, management,
government, community and others. The framework of corporate governance
includes obvious and inherent contracts between stakeholders and firms for the even
distribution of responsibilities as well as rights, processes. This helps in solving the
conflicting interest of the stakeholders and processes to appropriately supervise and
control the information flow within the organizations (Tricker, 2015).
Requirement 2
There is a strong link between corporate governance and financial markets. It
needs to be mentioned that corporate governance has a link with the liquidity as well
as the clients of the companies who hold the stock. High liquidity can contribute
towards the decrease in corporate governance of the companies as it contributes
towards the decline in stability of the clients of those companies since it is cheap for
them to sale a stock if it is liquid (Claessens & Yurtoglu, 2013). At the same time,
liquidity also has the capability to attract sophisticated stock agents which leads to
the overall improvement in the corporate governance of the companies. One
important aspects is that the institutional ownership plays a crucial role in promoting
corporate governance within the financial markets. The proportion of orders
performed by the small traders has association with fragile corporate governance
which indicates that the surplus of small traders can deteriorate the disciplines
applied by the outside market on corporate governance. Lastly, the variation in

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corporate governance in different countries creates different impact on the financial
markets of those countries (McCahery, Sautner & Starks, 2016).
Requirement 3
The presence of certain factors within the organizations indicates the
presence of strong corporate governance and three of these factors are discussed
below:
Presence of Strong, Qualified Board of Directors – The presence of a strong and
qualified Board of Directors indicates the presence of effective corporate governance
within a company because the directors have the knowledge as well as expertise on
different business operations and they have strong ethics and integrity. These
directors have strong diverse background and skill sets along with adequate time to
discharge their duties. All these aspects play crucial role in identifying the gaps in
governance within the organizations for the implementation of effective corporate
governance (Zhang, Zhu & Ding, 2013).
Effective Performance Evaluation Principles and Mechanism – Another major
factor is the presence of effective performance evaluation framework or mechanism
that indicates towards effective corporate governance. This helps in establishing
appropriate remuneration structure for the senior executives based on their
performance and in diminishing the conflict of the directors related to independence.
It also assists in establishing effective performance measurements for the directors
against the key performance measurement indicators. It ensures the presence of
effective compensation committee comprising the independent directors. These
aspects are needed for effective corporate governance (Hřebíček et al., 2014).

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Effective Risk Management Framework – The presence of effective risk
management framework is considered as a key pillar for effective corporate
governance within the organization. The existence of an effective risk management
framework helps in identifying and assessing the key risks faced by the companies
such as financial risk, operational risk, reputational risk, environmental risk, legal
risks and industry related risks. The Board is responsible for developing effective
strategies for managing these risks which can contribute towards the establishment
of effective corporate governance (Tao & Hutchinson, 2013).
Requirement 4
It can be seen from the provided information of Fuji Xerox that there are
certain major issues within the businesses of both New Zealand and Australia.
These issues can be seen in two areas; they are accounting and corporate
governance. These two companies had engaged in unsuitable accounting practice.
At the same time, there were certain internal control related problems in the
company such as the issues in Asia Pacific Operations (APO) related to subsidiaries
and others. The company has certain specific issues in accounting and governance
mechanism. These are discussed below.
Accounting Issues – It can be seen from the provided information that Fuji Xerox
New Zealand did not comply with the requirements of appropriate accounting
practice related to lease accounting. In addition, Fuji Xerox New Zealand was also
involved in the overstatement of revenue for equipment leased and the auditors
verified the occurrence of inappropriate accounting transactions for this purpose.
Despite of the notification, Fuji Xerox New Zealand did not revise the accounting
treatments. Moreover, the management of Fuji Xerox was responsible for the
adoption of inappropriate sales methods for their business. These are the key

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accounting manipulations in which Fuji Xerox was involved (Agrawal & Cooper,
2017).
Governance Issues – According to the provided situation of Fuji Xerox, the senior
management as well as employees of the company ignored the implemented
accounting and other principles related to accounting and internal control. This
aspect indicates towards the weakness in corporate governance that is related to the
company’s internal control. In addition, Fuji Xerox has internal control related issues
such as ineffective management of their subsidiaries and inefficiencies in regulatory
and administrative department. This issues affected the corporate governance
mechanism of Fuji Xerox by blocking the flow of information in the business
(Lebedeva et al., 2016).
Requirement 5
All over the world, there are instances of many companies collapsed due to
major corporate governance issues; and two of them are Enron and Satyam
Computer.
Enron – Enron had the appropriate structure and mechanism for corporate
governance within their organization, but no one followed these codes of corporate
governance (Dibra, 2016). The Board of the company allowed the senior
management in open violation of business codes, especially when they allowed the
Chief Financial Officer (CFO) for serving the special purpose entities. The audit
committee allowed the continuation of inappropriate accounting practices and they
did not take any attempt for examining these transactions. There was major failure in
preventing the questionable accounting practices (Dibra, 2016). Weak corporate
governance framework failed in detecting these issues within the company.

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Satyam Computer – In case of Satyam Computer, the top level management failed
in estimating the strength of infection related to corporate governance within the
organization. There were also certain major questions in the role of the auditors
since they unnoticed the financial frauds in the accounting books. In addition, the
corporate governance failure in Satyam Computer contributed majorly to the collapse
of the whole business since they failed in detecting the fraudulent financial activities
which were taking place (Bhasin, 2013). Lack of governance was a key reason for
these issues in Satyam Computer.
Requirement 6
It needs to be mentioned that the manipulation in financial information and
statements affects the price of stocks and bonds of the companies and it provides
the management with the incentive for exceeding the market expectations. When the
managements of the companies are majorly compensated with stock or they have
bonus tied up to their earnings, there is major incentives for the management behind
such manipulations. In addition, firms with major debts in their capital structure may
involve in these kinds of manipulations with the aim to maintain their debt
agreements (Hass, Tarsalewska & Zhan, 2016).

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References
Agrawal, A., & Cooper, T. (2017). Corporate governance consequences of
accounting scandals: Evidence from top management, CFO and auditor
turnover. Quarterly Journal of Finance, 7(01), 1650014.
Bhasin, M. L. (2013). Corporate accounting scandal at Satyam: A case study of
India’s enron. European Journal of Business and Social Sciences, 1(12), 25-
47.
Claessens, S., & Yurtoglu, B. B. (2013). Corporate governance in emerging markets:
A survey. Emerging markets review, 15, 1-33.
Dibra, R. (2016). Corporate Governance failure: the case of Enron and
Parmalat. European Scientific Journal, ESJ, 12(16), 283.
Hass, L. H., Tarsalewska, M., & Zhan, F. (2016). Equity incentives and corporate
fraud in China. Journal of business ethics, 138(4), 723-742.
Hřebíček, J., Soukopová, J., Štencl, M., & Trenz, O. (2014). Integration of economic,
environmental, social and corporate governance performance and reporting in
enterprises. Acta Universitatis Agriculturae et Silviculturae Mendelianae
Brunensis, 59(7), 157-166.
Lebedeva, T. E., Akhmetshin, E. M., Dzagoyeva, M. R., Kobersy, I. S., & Ikoev, S. K.
(2016). Corporate governance issues and control in conditions of unstable
capital risk. International Journal of Economics and Financial Issues, 6(1S),
25-32.

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McCahery, J. A., Sautner, Z., & Starks, L. T. (2016). Behind the scenes: The
corporate governance preferences of institutional investors. The Journal of
Finance, 71(6), 2905-2932.
Tao, N. B., & Hutchinson, M. (2013). Corporate governance and risk management:
The role of risk management and compensation committees. Journal of
Contemporary Accounting & Economics, 9(1), 83-99.
Tricker, B. (2015). Corporate governance: Principles, policies, and practices. Oxford
University Press, USA.
Zhang, J. Q., Zhu, H., & Ding, H. B. (2013). Board composition and corporate social
responsibility: An empirical investigation in the post Sarbanes-Oxley
era. Journal of business ethics, 114(3), 381-392.