Analyzing Corporate Failures: WorldCom and Parmalat

The analysis delves into the scandals of WorldCom and Parmalat, highlighting how unethical practices led to significant financial and reputational damages. By examining the failure in corporate governance, this assignment discusses the importance of ethical standards and effective oversight mech...Read More

Running head: CORPORATE GOVERNANCE AND ETHICS
CORPORATE GOVERNANCE AND ETHICS
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1CORPORATE GOVERNANCE AND ETHICS
Abstract:
Corporate governance and ethics are the policies and the theories by which a company
functions. These are some sort of rules that are maintained by employees, employers and
shareholders of a company. Violating these ethics can result into huge financial losses and
even closure of a company. This report discusses on the use of corporate governance and
ethics and its benefits within a company. The corporate governance theories have been
highlighted along with the ethics for maintaining financial structure of a company. Examples
of two companies which violated the ethical rules have been discussed along with the
consequences that they went through. The ethical issues of corporate governance and their
future aspects have been highlighted further. Lastly, the report concludes with the overview
of the whole report.

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Table of Contents
Introduction:...............................................................................................................................3
Discussions:................................................................................................................................3
Ethics for corporate governance:...........................................................................................4
The ethics for the management of funds:...............................................................................5
The theories of corporate governance:...................................................................................5
Ethical frameworks for governance:......................................................................................7
Benefits of corporate governance and ethics:........................................................................7
Example of two companies violating corporate governance and ethics:...............................8
Ethical issues in corporate governance and the future prospects:........................................11
Conclusions:.............................................................................................................................12
References:...............................................................................................................................13

3CORPORATE GOVERNANCE AND ETHICS
Introduction:
Corporate governance is the structure of policies and method of business which a
company follows. It demonstrates the process of power and responsibility that moves
between board of directors, managers, CEO and all the shareholders of a company (Tricker &
Tricker, 2015). The basic structure of the system comprises of shareholders vote and
authorizes a team of board of directors, who are given financial responsibilities for the
interest of the shareholders. The team then employs a CEO, who employs management team
and further progress takes place. A chain is created according to the distribution of power and
responsibilities. The internal rules are created about the whole process, and they are needed to
be maintained to run a company efficiently. It is a set of ethics that needs to be maintained.
The ethics are maintained for financial growth of the company and for maintaining healthy
relationship among all the staffs within company. Violating these ethics has resulted in
collapsing and financial losses for many companies. Sometimes, proper ethics are not
maintained within a company. This report highlights on the basic rules or ethics of corporate
governance and how the system works. There will be analysis on why these ethics need to be
followed and how the methods are implemented in a company. There will be discussions on
benefits and ethical issues of corporate governance. There will be evaluation about two
companies violating ethics and about how they collapsed due to this. Lastly, there will be
discussion on how the ethics can be improved and the future aspects of the ethics which can
benefit the companies further.
Discussions:
Corporate governance and ethics both run with each other for maintaining a standard
for running a company. The difference between them is that the ethics are more logical and
properly appropriate standards that a corporation maintains for functioning wisely, where

4CORPORATE GOVERNANCE AND ETHICS
corporate governance methods are the ways by which a corporation makes the efforts to be as
ethical as possible while maintaining a financial growth. The corporate governance and ethics
varies according to different types of business. There are difference in governance and ethics
of private companies and public companies.
Ethics for corporate governance:
In 2004, the ethics for the government pension fund was formed. They comprise of
three documents they are as follows:
The UN Global compact: It as introduced in 2000 and comprises of ten basic theories for
human rights, anti corruption, the labors and working environment (Voegtlin & Pless, 2014).
The theories or principles are as follows:
 The human rights should be respected and they should not be violated.
 Child labors, forced labor and injustice to employers should be eased totally.
 Corruption, fraud in work place and bribery should be eliminated.
 The environmental challenges should be faced properly and environmental
responsibilities should be promoted with great effort.
The OECD Principles of Corporate Governance: It was formed in 2004 and consists of
document that covers efficient framework for corporate governance, the interests of all the
shareholders and owners, impartial methods for all the shareholders, acknowledgement and
transparency within the staffs and obligations of the board of directors (Siems & Alvarez-
Macotela, 2014).
The OECD Guidelines for Multinational Enterprises: It was formed in 2000. This document
consists of proposals in operations like transparency, relation within employers and
employees, and the working environment, fighting against bribery and corruptions, interests

5CORPORATE GOVERNANCE AND ETHICS
of the consumers, departments of science and technology and competition in the markets
(Tergeist, 2016).
Principles for Corporate Governance and the Protection of Financial Assets: It was formed
in 2004 and consists of promoting rights of the owners and built excellent corporate
governance, making proper strategies and communications within the company, preparing
structure of the company boards and long term continuity of functioning of the company
(Gitman, Juchau & Flanagan, 2015).
The ethics for the management of funds:
For better management of company’s financial department, ethical guidelines for
some issues have been addressed. They are as follows:
 For promoting financial returns for a long terms basis, the corporate governance that
comprises of the UN global compact, the OECD guidelines for multinational
companies and the OECD principles for corporate governance are implemented.
 Production of weapons by the companies from their funds either by themselves or
through other individuals results in breaching of main human principles.
 Prohibition of companies from investment areas where risk of violating human rights
and individual rights in rivalry situations are found along with corruption,
environmental deteriorations.
The finance ministry is responsible to take care of the funds to be managed in genuine ethical
manner.
The theories of corporate governance:
There are several theories related to corporate governance which describes the
operating methods of the boards and the process by which decisions are made by the directors

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of a company. There are six theories of corporate governance stated by Stiles and Taylor, out
of which three theories have standard characters. The theories are as follows:
Agency theory: Agency theory was found from the work of Adolf Berle and Gardiner Means.
It was found to trace on the problems of individual greed. Call agency cost is all about
assigning managers to maintain financial departments which are not in their planning. In case
of business where the owner is the manager, this cost does not arrive (Bosse & Philips, 2016).
That is the reason the governance problem in private and public companies are different from
each other. These problems cannot be totally avoided but if some active measures are taken
they can be limited. To control these issues, the public companies have introduced incentives
in salaries for the managers. Growing implementation of stock options and impartiality based
payment methods help in controlling the agency costs. These opportunities to earn more
money help the managers to focus on their individual incomes through the benefits provided
by the company. In case of, large sector public organizations, the shareholders recruit the
directors to look after the working of the managers which increases the agency costs.
Stakeholder theory: This theory is mainly practiced in Japan and continental European
countries like Germany. In this theory, about half membership seats for the board of directors
are allotted for the representatives of the employees (Pige, 2017). This theory mentions that
bankers of the company and other shareholders should have seats in board of directors. This
theory objects to the expectation that only directors and managers have duty towards the
owner of the company.
Stewardship theory: This theory proposes that in board practice, instructions are inspired
more than personal finance. According to the psychology of a company, the suggestion is that
self belief and fulfillment emerge in the decision making. In this theory, the directors should
look on the interests of the employees bigger than their self interest (Cho, Huang &

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Padmanabhan, 2014). But in most of the outcome, the theory is mute and the director finds
other ways for guiding principles. When a seat is secured by a shareholder among the board
of directors, the director needs to follow the aims of the shareholder as set on the company
law.
Ethical frameworks for governance:
The theories discussed corporate governance are encircled in ethics as significant and
idealized. The right action can be decided on assessing the benefits derived from the theories
and by following more accurate rules what may be result of the actions taken. But there is
meaningful thinking that which have important roles in maintaining corporate governance
which is known as ethical egoism (Dahlbeck, 2016). In this system, an individual carries on
the work which is suitable for him without thinking the outcomes for others (Too & Weaver,
2014). The CEO attempts to find maximum personal profits. The role that corporate
governance maintains is curbing the actions of the CEO’s without spoiling their working
interests. In the agency theory, the board negotiates with the CEO and policies are paid to the
other members of the management team to create a way for common results.
Benefits of corporate governance and ethics:
The benefits of corporate governance and ethics are as follows:
Improved reputation of a company: Implementing corporate governance helps in boosting the
reputation of a company. Adding corporate governance results in joining of more
stakeholders who will be interested to work with that company. Strong controls in the
company among board of directors, managers and employees can attract many stakeholders
to invest in the company (Saeidi et al., 2015). Through sharing of internal information with
the stakeholder increases transparency within the company, which in turn makes the people
or customers more confident about the company.

8CORPORATE GOVERNANCE AND ETHICS
Less fine and penalties: The benefit of corporate governance includes following policies
which requires the company to implement strategies to stay flexible with all the local and
national rules and laws to run a company. In corporate governance, the board of directors or
managers needs to handle the company’s rule in employing or recruitment policies before
hiring any staffs (Arlen & Kahan, 2016). It might require the company’s accounting
department to go through an audit by an independent auditor once or twice in a year.
Decrease in conflicts and fraud within a company: Implementation of corporate governance
helps in restricting the possibility for bad behavior or by employees by applying some rules
to decrease frauds and bribes (DeZoort & Harrison, 2016). In corporate governance, a
company might set a rule which the company management needs to sign to avoid any
conflicts in which the members have their own personal interests. For example, the company
might not allow loans for the family members of the management team or recruiting any
family member of the team. Some external audits are made and signed by the management
team members to prevent any frauds within the company.
Reducing or preventing cyber attacks: Having a proper plan of cyber security within a
company can prevent any threats of cyber attacks. Corporate governance for maintaining
cyber security of a company needs to be followed for preventing any types of threats.
Example of two companies violating corporate governance and ethics:
Violating corporate governance and ethics can lead to collapsing and financial losses
for many companies. WorldCom and Bernard L. Madoff Investment Securities are two
companies that faced terrible consequence for violating the ethics. These two incidents shook
the whole nation and resulted in huge financial losses.
In 2005, WorldCom a telecommunication company failed terribly and felt into
bankruptcy and became one of the biggest financial frauds in the history. Bernard Ebbers, the

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former CEO of the company was accused for the financial fraud and was put into prison for
25 years (Leighton, 2015). In the 15 years of operations, the company made a high financial
growth. The company had business over 65 countries (Bhasin, 2016). The United States
Securities and Exchange Commission took information about financial procedures and loan
provided to the officers of the WorldCom (Gottschalk, 2018). The company then cut down
3700 jobs of their employees. This affected the credit ratings of WorldCom (Trautman,
2016). An investigation team was set up by US government to find out the truth about the
scandal. Bernard Ebbers stepped down from the role of CEO. It was later revealed that the
company has provided him $ 339.7 million to clear the debt of the loan that he took for
buying his shares. The company later announced that a huge loss occurred for wrong
accounting of about $ 3.8 billion (Chorafas, 2015). Then, they cut down more 17,000 jobs
which was greater than 20 % of total workforce. The share price of the company dropped
down more than 80 %. Several suits were filed against the company which further made the
company collapse. The chief financial officer, Scott Sullivan and the controller David Myers
were also arrested and were put into 65 years of imprisonment (Wisner & Brown, 2015).
These consequences could have been avoided if the company maintained ethical corporate
governance. Breaching corporate governance by CEO Bernard resulted in the financial loss.
At the early stage of operations, Bernard’s decisions were widely appreciated as it resulted in
substantial financial growth of the company. But at later stages, he produced fake images of
himself to the company’s board of directors, employees and also to the market. He made
unrealistic promises and focused on building his personal financial growth without paying
attention on the possible consequences that the company could face. When his personal
finance started suffering he made efforts to increase the stock price of WorldCom. Still, he
could not avoid financial losses of the company. It was later found out that the chief financial
officer was the main culprit behind this fraud. It was clear that Bernard was aware of the full

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fraud and the way it was implemented. A proper corporate governance and ethics should have
been followed to prevent any losses.
Another big financial fraud was conducted in Bernard L. Madoff Investment
Securities, which shook the entire world (Stolowy et al., 2014). The company implemented
different techniques for duping people with their money which is known as Ponzi schemes
(Baucus & Mitteness, 2016). The CEO of the company Bernard L. Madoff monitored the
whole scheme for more than 15 years. He was arrested for the fraud and begged guilty for
duping billions of US dollars. The company was founded as an investment firm in 1960
(Lewis, 2016). After implementing some latest computer technologies, it became on the
largest companies in the US. In this company, the investors could keep their money in a
savings fund in return they used to receive an amount of above ten percent interest. This
made the company run one of the biggest Ponzi scheme in the world. For running a Ponzi
scheme, the companies mainly return the money of the old investors by receiving money
from new investors. This process was also applied by Bernard L. Madoff investment
securities. A variety of techniques were applied to ensure that the scam could not be disclosed
by any means. Madoff used to sell all the financial instruments of the company at each
month’s end which ensured that the fund only report the cash of the investors. The investors
could not access their online transaction of money rather a mail was sent to them every month
about their information of the account and balances. Despite of so much prevention, the scam
was finally revealed in 2008 which completely destroyed the existence of the company.
Andrew Bernard and Mark Bernard, the two sons of Bernard Maddoff finally revealed the
scam and Madoff was arrested on December 2008. In 2009 he was charged with all the
charges and sent to 150 years of imprisonment (Azim & Azam, 2016). Being a moral agent of
the company, he needed to ensure the correct way for the growth of the company rather he
took the wrong way and breached the ethics to run a company efficiently. The progress of a

11CORPORATE GOVERNANCE AND ETHICS
company depends on the behavior of the moral agents and how they find the honest way for
maintaining company ethics.
Ethical issues in corporate governance and the future prospects:
To maintain proper corporate governance in a company, some ethics needs to be
maintained. Violating these ethics can result in big losses and frauds as stated by two
examples discussed above. The conflict of interest within a company needs to be avoided to
prevent staffs taking personal advantages which can result in the disadvantages of the
company. The board members can be answerable to conflicts of interest in different ways.
Another ethical issue for a company is to maintain transparency among all the staffs and
shareholders. Maintaining transparency helps the stakeholders to have full and accurate
information of the company, its way of conducting business and all the negative and positive
aspects of the company. Transparency is extremely important to recognize all the
shareholders so that proper communications occurs between them and full rights are provided
to each shareholder (Levit & Malenko, 2016). Breaching this ethics can result in conflict
among the board members and shareholder and can result in downfall of the company.
Another ethics which is extremely important is accountability (Christensen et al., 2015). This
is the way the board members answers to the stakeholders about the financial performance of
the company and the different processes by which they are achieved. Accountability includes
a process which is of two ways. Many organizations such as trade unions demands on better
accountability. The main focus in this ethics is for better relationship between the board of a
company and its shareholders. All these ethics need to be maintained for better corporate
governance of a company. The future of all the organizations could be better if these ethics
are improved further according to the market demands. The government of all the countries
should keep an eye on all the private and public companies so that the corporate governance
and ethics are not violated and big frauds like that of WorldCom and Bernard L. Madoff

12CORPORATE GOVERNANCE AND ETHICS
Investment Securities are not repeated. With the advancement of technologies and increasing
cyber crimes, it is necessary to implement laws that are as strong as the technologies.
Conclusions:
Corporate governance and ethics are the most important rules that all the
organizations need to follow for improving their business and preventing any shorts of
financial and non financial frauds. These ethics need to be followed to maintain better
relationships between shareholders, board of directors and employees of a company. The
benefits associated with these ethics are extremely useful for improving financial and non-
financial aspects of a company. Violation of company ethics has resulted in fallout and
financial losses of many companies around the world. Proper transparency and accountability
needs to be maintained for avoiding any short of conflicts among the members of a company.
Conflicts of interest need to be avoided to have smooth operations within a company.
Applying more advanced, planned and secured corporate governance and ethics will lead to
better business process of a company and prevent any further frauds. This report focused on
the use of corporate governance and ethics for better functioning of a company. There are
discussions on the benefits of implementation of the ethics. The ethics and the theories
related to corporate governance have been evaluated further. The ethics for management of
funds has been discussed. The ethical frameworks have been evaluated further. Examples of
two companies which violated corporate governance and how these resulted in collapsing of
these companies have been discussed. Lastly, the ethical issues of corporate governance and
the future aspects have been discussed.

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Dahlbeck, J. (2016). Character education and ethical egoism: Spinoza on self-preservation as
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Crime (pp. 95-119). Springer, Cham.

14CORPORATE GOVERNANCE AND ETHICS
Leighton, P. (2015). Ebber’s25 year sentence for WorldCom fraud upheld. good. Rich Get
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