Comprehensive Structure of Corporate Governance in Post-Enron
Manuel A. Tipgos and Thomas J. Keefe
governance structures have traditionally been a private matter
between shareholders and managers with some state law restrictions,
but the Sarbanes-Oxley Act (SOA) has made structures governing
the conduct of the corporation a matter of federal law. Even
the adoption of a code of ethics, previously within the domain
of management prerogatives, is now a requirement under SOA.
principal weakness of corporate governance today is the
excessive concentration of power in the hands of top management.
Rebalancing or equalizing this power is a prerequisite for
controlling management fraud and promoting accurate financial
reporting. To regain the confidence of the financial markets,
a revolutionary approach to corporate governance is needed.
Formally recognizing employees as a group and as key participants
in the corporate process, rather than as a factor of production
and a commodity traded in the labor market, is an important
element in a transition to a more balanced governance structure.
structure of corporate governance is needed in reflecting
this revolutionary view of employees. The authors describe
such a structure in the following sections in the hopes
of stimulating thought and discussion about alternatives
to the current “tone at the top” approach. Built
using a bottom-up process to support the view that the corporate
enterprise exists under a public trust charter granted by
the stakeholders or society in general, this approach depends
more on checks and balances among the board of directors,
top management, and the employees.
Symptom of a Problem
systemic problems at companies such as Enron, WorldCom,
and Tyco International arose because of an imbalance of
power in favor of top management in corporate organizations.
The shift in power from shareholders to management started
with the appearance of large corporations as a result of
the Industrial Revolution, when small capitalists pooled
their resources to finance bigger ventures that were operated
by professional managers referred to subsequently as “managers
the unlimited power of managers for hire over the affairs
of a corporation has grown consistent with the growth and
importance of the corporate enterprise in our society. The
first glimpse of management’s power was reflected
in the corporate social responsibility debate of the 1960s
and 1970s. Classical economists, led by Nobel Prize laureate
Milton Friedman, argued that the purpose of business is
to earn maximum profit for the shareholders. Others rejected
the notion of maximum profits as the sole, overriding purpose
of business. Maintaining
that business has a social responsibility to its stakeholders
and to society at large, they advocated that top management
should use the vast economic power of business to promote
social goals such as cleaning the environment, urban renewal,
and equal opportunity. Since then, top management’s
power has grown, and boards of directors have become rubber
interest is whether SOA would provide a mechanism for rebalancing
the power between the board of directors and top management.
More fundamentally, can implementing the SOA provisions
prevent management fraud?
does not diminish the existing discretions and prerogatives
of management in conducting and pursuing the business of
the corporation, nor does its requirement for an independent
board of directors and an independent audit committee really
change the power of management. The force of law or regulation
can be a deterrent, but it cannot stop management fraud.
Management fraud can be stopped only by management itself.
authors’ proposed corporate structure attempts to
rebalance power in the corporation by recognizing employee
groups as members of the corporate team. In this context,
the three key participants in the corporate process—the
board of directors, management, and the employees—can
communicate directly with each other within and outside
the confines of the board to share critical information
about the business of the corporation.
Corporate Process and the Employees
conduct of the corporation is a three-way process involving
the board of directors, top management, and the employees.
Unfortunately, the potential role of the employees in this
process has never been adequately recognized. The employees
have traditionally been considered under the control of
management, while the conduct of the corporation’s
affairs is worked out between the board of directors and
the last 10 to 15 years, two significant and dramatic changes
have transpired in the social and economic status of employees.
First, reengineered organizations and the concept of employee
empowerment have led employees to become a force in making
significant decisions affecting the success of a corporation.
Second, the employees are increasingly owners of a corporation
as participants of 401(k) and other savings and retirement
programs. As “new owners,” they are connected
with the corporation in three significant ways:
by direct interest in the corporate enterprise through
a source of security in retirement years through 401(k)
and other retirement programs; and
a source of “collateral benefit” from being
a stakeholder (as members of society) in the corporate
to its fullest, a three-way relationship among the board,
management, and the employees will balance power within
the corporation, promote accurate financial reporting, prevent
management fraud, and regain the integrity of the financial
markets with minimum interference from the government.
Relationships: Shared Visions
the core of restructuring corporate governance is empowerment
at all levels—shareholders, the board, top management,
and the employees—consistent with the concept of empowered
or reengineered organizations. The goals and objectives
of the corporation will be a shared vision. SOA has changed
the playing field for controls, creating an environment
where such change can occur. Under the law, top management
has to certify the accuracy of the financial reports and
make certain disclosures about the controls and procedures
in place to avoid fraudulent financial reporting. Even a
code of ethics for senior corporate financial officers is
now a requirement of the law.
keep all these constituencies focused and vigilant about
their shared responsibility of complying with SOA as well
as their responsibility to the stakeholders of the corporation,
each of them will assume a primary responsibility of upholding
key shared goals. Matching and assigning the goals to each
group is crucial to the success of the new structure, considering
each group’s past problems.
control. Historically, internal control has
focused on conforming employees’ actions to the desires
of management. One of the problems underscored in the recent
scandals, however, has been management’s inappropriate
overrides of accounting systems that were functioning properly
under the control of employees. Assigning internal control
to the employees will enhance the integrity of the financial
records by preventing management from overriding the controls
and manipulating the transactions.
governance. The board’s job will be
to create and maintain a structure that will ensure harmony
and cooperation between management and the employees in
pursuing the goals and objectives of the organization rather
than simply rubber-stamping the actions of management.
code of ethics. Management will be assigned
responsibility for the code of ethics to promote the importance
of corporate morality and ethical standards. This will also
put management in a leadership role rather than in the cop’s
role it currently plays in internal control systems.
vigilance by each group will rebalance corporate power,
guarantee accurate financial reporting, stop management
fraud, and encourage good corporate behavior. Under the
concept of empowered or reengineered organizations as the
cornerstone of this comprehensive governance structure,
all three goals are shared visions and shared responsibilities.
the Role of Employees
recognition of the role of employees as key participants
in the corporate process signifies a move toward an enlightened
view of employees in general, which will promote a cooperative
relationship among shareholders, top management, and employees
in the corporate environment.
psychological impact on labor, individually and collectively,
will be of historic magnitude, and perhaps may be understood
only sometime in the future. In the near term, however,
the new self-esteem of employees will probably lead to dramatic
gains in productivity. A new era in resource management
may open, including a reconsideration of compensation issues.
fraud will be prevented at its source because it would be
difficult for management to cook the books by overriding
internal controls or manipulating transactions under the
watchful eyes of employees. This will also lead to management’s
accountability in other areas.
though retaliation or retribution from management is now
a crime under SOA, SOA does not guarantee that employees
will step up as whistle-blowers. As recent whistle-blowers
have found out, coworkers and other sectors of society view
them as traitors. Direct and equal access to the board,
management, and the independent audit committee will empower
employees to confront any group for misbehavior.
the structure. There is a distinction between
the interests of stakeholders and of stockholders in an
enterprise. Stakeholders, broadly defined as society as
a whole, are interested in the collateral benefits derived
from the success of the enterprise, such as the abundance
of a product or a service, a clean environment, or a general
rise in the standard of living. Stockholders have a dual
interest in the success of the enterprise: direct interest
as a reward for their investment, and collateral benefit
as stakeholders. Similar benefits are enjoyed by management
and employees based on their close association with the
enterprise. Therefore, for stockholders, management, and
employees with empowered relationships, the success of the
enterprise becomes a shared goal.
provide the corporate enterprise with a “charter”
to operate and enjoy approval under the public trust. Business
corporations, as well as other social institutions, must
uphold the public trust to maintain their legitimacy. The
public trust has been shaken by revelations of misconduct
by corporate America, and the current volatility of the
financial markets continues to reflect the concerns of the
use a corporation’s annual reports and financial statements
to gauge the success of its operations and to judge whether
it is upholding the public trust. Stakeholders require truth,
honesty, and integrity in these financial reports. This
expectation makes the quality of financial reports one of
the most important components of corporate America. The
current SOA requirement that both the CEO and the CFO attest
to the accuracy of their financial reports may accomplish
this end to a considerable degree, but not completely. The
best guarantee will come from a reengineered corporate structure
predicated on the checks and balances outlined above, whose
constituent parts adopt the qualities of truth, honesty,
and integrity of financial reports as part of their shared
groups act primarily of “guardians of the public trust”
in the proposed comprehensive reengineering of corporate
governance structure. They are an enlightened public accounting
profession and the independent audit committee.
enlightened public accounting profession. A
public accounting profession, practicing with extraordinary
dedication and integrity, is an important element of satisfying
the public trust for stakeholders as well as shareholders.
Accountants with the knowledge, training, experience, and
mindset needed to guard and uphold the public trust should
be sought by every corporation desiring to ensure its stakeholders
that its financial statements and disclosures meet the stakeholders’
independent audit committee. Under the empowered,
reengineered relationships among management, employees,
and the board, the audit committee will have two fundamental
responsibilities. Internally, it will oversee the annual
audit to ensure the accuracy and integrity of the financial
statements as required by legislation or statute. It will
also ensure that there are no breakdowns in corporate governance
rules and procedures, including the rules of ethical conduct
and internal control. The audit committee also would be
the practical monitor collecting information regarding corporate
misconduct and encouraging those with such information to
the role and responsibility of the independent audit committee
would be to uphold the public trust with respect to the
operation of the corporate organization, serving as the
link between the stakeholders and the corporate organization.
An illustration of the relationships discussed is shown
in the Exhibit.
audit function and management accountants.
The internal audit function should generally report to the
independent audit committee, and its work should be focused
to uphold the public trust. While continuing to perform
its basic responsibilities, such as compliance audits, operational
audits, assistance to external auditors, special projects
for the audit committee, and other tasks requested by the
operating departments, the internal auditor will no longer
act as a watchdog for the board to ensure that management
creates an environment of controls to protect corporate
assets from misuse or fraud committed by the employees.
Rather, the internal auditor will promote a positive, cooperative
relationship among the key participants of the corporate
accountants would face a big challenge. They would be charged
with responsibilities for:
employees’ active and knowledgeable participation
in their new role as a member of the corporate team;
the business’ profitability;
control functioning as planned;
continuous vigilance against any type of “cooking
the books” and creative accounting;
the infrastructures to facilitate top management’s
certification and disclosure responsibilities under the
Sarbanes-Oxley Act; and
code of ethics that will transform the corporate enterprise
into a moral and ethical entity in the post-Enron era.
A. Tipgos, PhD, CPA, is a professor of accounting
at the School of Business at Indiana University Southeast.
Thomas J. Keefe, PhD, is an associate professor
of business administration at the School of Business at Indiana