Looking at governance as the absolute, uncompromising, probity with which that authority is exercised in respect of corporate affairs, places in focus the objective rather than the processes by which to achieve it. In contrast, the promoters of the various governance regimes have committed the fallacy of substituting the ‘‘means’’ for the ‘‘end’’ in mind. Perhaps, were they to have distinguished the desired end from those preferred processes, they may well have seen that the former and the latter are not necessarily linked in the way the conventional and repetitive rhetoric assumes.
Again, repetitive explanation of and allusion to corporate governance in terms of the processes by which it is to be achieved have had their way.
2. Berle and Means (1932).
3. It is arguable that the outcomes of the operations of the Vanderbilts and J. P.
Morgan were relatively as significant in their time as globalization has been in the recent past.
4. SeeFranzini (2004)for the outline of events up to February 2004.
5. SeeSmith and Emshwiller (2003)for example, for a description of the essence of the surprise element of Enron’s unwinding over 24 days.
6. The recurring episodes of collapses in Australia during the 1960s, 1970s and 1980s are chronicled and discussed in Clarke, Dean, and Oliver (2003). These should be considered against the background of the failures elsewhere over the same period – of the Maxwell insurance empire: (seeThompson and Delano (1991)); the crisis at Lloyd’s insurance (seeGunn (1992); Polly Peck in the U.K., BCCI worldwide (seeBeaty and Gwynne, 1993; Olympia and York in Canada (seeFoster 1993); Prudential Insurance (see,Eichenwald, 1995; the Savings and Loans affair in the United States: (seePizzo, Fricker, and Muolo, 1989; Robinson, 1991); and, for example, in Italy the Banco Ambrosiano (seeDiFonzo, 1983;Almerighi, 2002, Ibanchieri di Dio; il caso Calvi).
7. See, for example,Australian Society of Accountants (1966).
8. SeeHaigh (2003) for a balanced discussion of CEO’sinvisible handouts, and Flanagan (2003)for a more vitriolic discussion.
9. Most offer no comment on the amount of wisdom after the event. Nor do they comment usually on the mainly unequivocal support for the companies when they were the darlings of the market.
10. Hubbard, Delyth, Heap, and Cocks (2002).
11. Miller (1990).
12. We refer here to the comments emerging from the public enquiries, commit- tees and commissions that have debated governance issues, for they are the means of shaping public understanding. This is particularly so in respect of the manipulative nature of corporategroup structures. The James Hardie asbestos compensation affair supports the arguments put byClarke et al. (2003), Chaps. 16 and 17 that the current corporate group structure is possibly ungovernable.
13. Support of that proposition in the United States by Warren Buffett seems to have taken on the mantle of the official voice from commerce, and by Arthur Levitt, the authoritative voice of securities regulation.
14. We should note the confrontations between the SEC, the FASB and the cor- porate community in the early 1990s regarding the expensing of stock options.
Lobbyists on Capital Hill won out in the end.Levitt and Dyer (2002, pp. 11–12) notes how Congress ‘‘turned on him’’ when he was pushing for the expensing of stock options in the early 1990s. Congress has had its day again rejecting the com- pulsory expensing ofallstock options on 15 June 2004. The House of Represent- atives Financial Services Committee approved a bill to restrict any FASB option expensing standard to options granted to the top five officers of a company. This legislation will create the ridiculous situation in which the value of stock options will be anexpenseandnot an expensedepending on who receives them.
15. This is a curious recourse tosubstance over formargument – thesubstancehas been wrongly identified as theform, and the form as thesubstance.
16. We saypresumed, for that view tends to ignore the current affinity with cor- porate stakeholder theory that asserts that corporations have obligations to a
considerably wider constituency than merely shareholders. It also draws upon neo-capitalism perceptions of the purpose and means of commerce. Nonetheless, the legal obligation of companies, in contrast to their now claimed social obligations, is to the shareholders.
17. SeeBlasi, Kruse, and Berstein (2003), Parts I and II, for the general argument and references to studies supportive of the positive benefits claimed of issuing stock options to employees.
18. As part of his allegation that ‘‘the Stock Option: [was] The CEO’s license to Steal’’,Flanagan (2003, p. 39), is a good example – whereas he implies a connection between thepoorperformances Enron and WorldCom disclosed once the accounts were adjusted for the alleged manipulations, in contrast he begrudgingly notes that in respect to Citicorp – whilst Citicorp did well in 2001 ‘‘yWeill did a lot better’’.
19. SeeBlasi et al. (2003, pp. 85–88).
20. This is theeffective price for stockholders who participate in stock splits in 1993 and 1999. Theactualprice topped at around $US50 in 2000.
21. For illustrations of this kind see,Blasi et al. (2003, pp. 79–153).
22. In 1981, President Reagan increased the differential between capital gains tax and income tax, making the capital gains from options trading an attractive tax alternative, especially for those with options in their 401(k) pension portfolios. In 1993, President Clinton indirectly increased that differential by capping the tax de- duction for cash components of salaries at $US1 million.
23. That ployhas contributed to the notion that the stock options included in executives’ remuneration packagesarean expense of the issuing company. The ar- gument has been seductive. Of course, the bottom-line would be reduced whenever an amount is deducted – but that does not legitimize the deduction, per se.
24. Curiously, that would seem to be a stronger argument for declaring the value of options ‘‘revenue’’ to the company, rather than an expense.
25. This aspect is discussed inClarke, et al. (2003), especially Chaps. 16 and 17.
26. The applications of the independence notion are very wide. Accounting firms are reported (e.g.AFR, 27 May 2004) to have not only located their ‘‘consulting’’
activities and their ‘‘audit’’ activities in separate companies, but now also their
‘‘corporate turnaround’’ and ‘‘insolvency’’ practices.
27. It has been argued elsewhere, for example, inCorporate Collapsey(Clarke et al., 2003; pp. 247–288) that the parent/subsidiary company structure now in in- creasingly complex arrangements has been a major vehicle for corporate malpractice, and in particular for the transfer of resources from companies in which the public have investment to the private companies of promoters and executives. Related party disclosures are designed to frustrate that, but their ineffectiveness is well illustrated by the transfers effected by Andrew Fastow through his management of Enron’s SPEs. See, for example,Fox (2003);Partnoy (2003);Smith and Ermshwiller (2003), regarding Fastow’s involvement with the Chewco, LJM1 and LJM2 partnerships.
28. It is not suggested that this was Andersen’s strategy. It is documented that the expectation that non-audit service fees could rise to $US100 million influenced the firm’s decision to retain the Enron audit. Point is, however, in other circumstances, any allegation that the Andersen firm consulted with the protection of theauditfee in mind, is just as plausible as the inferences habitually drawn regarding fees for non-audit services underpinning a loss of independence.
FRANK CLARKE AND GRAEME DEAN 36
29. See submissions to the JPCAA Inquiry into the Independence of Registered Company Auditors and Hansard (2002) transcript of evidence (www.aph.gov.au) and to the HIH Royal Commission (Report of the Royal Commission, Vol. II) by Clarke, Dean and Wolnizer (2002a,b); and a submission by Clarke, Dean and Ha- nsard transcript of evidence to the Senate Enquiry into the CLERP9 Bill, 2004 (Clarke & Dean, 2004). (www.aph.gov.au)
30. The alleged misdeeds of the Andersen firm appear to be central to the case of those pressing the conventional independence line of argument. The circumstances surrounding Andersen’s forced retirement from practice are less clear than usually presented. As early as May 2002 Washington Post journalist Jackie Spinner ‘‘ex- plained’’ how the remaining Big Four representatives agreed with Senator Billy Tauzin that Andersen had to be ‘‘cut loose’’; see ‘‘Sullied accounting firms regaining political clout’’,Washington Post, 12 May, 2002, p. A01; see alsoClarke et al. (2003, p. 216). More on the same issue appears inMorrison (2004), Rush to Judgment: The lynching of Arthur Andersen & Co.Critical Perspectives on Accounting, Vol. 15, No.
3, pp. 335–375.
31. See Clarke et al. (2003), for a discussion of HIH’s accounting – especially Chap. 15.
32. There has been considerable misunderstanding regarding both the term and the practice as Enron applied it. In many commentaries this is referred to improperly as mark-to-market. But no market existed for the gas supply contracts for which Enron first gained explicit approval to use the technique.Fusaro and Miller (2002) note that the proper term ismark-to-modelin which for similar no-price contracts the finance industry developed models by which to estimate (what we might call)syn- thetic prices. Enron’s use of themark-to-modeltechnique is also properly described, and practice criticized, byFusaro and Miller (2002, pp. 35–36),Swartz and Watkins (2003, p. 94)andCruver (2003, p. 79). Other commentators, e.g.Fox (2003),Krug- man (2003)andMcLean and Elkind (2003), appear to miss the point and the sub- tleties of the labels. In contrast, Partnoy (2003, p. 159), notes the impact of computer-generated valuations for derivatives, though does not relate this to Enron’s activities.
33. These included the widest imaginable contracts, including such instruments as weather futures.
34. Discussionrather thandebatein this context, for there has not been any real debate as to why the similar measures failed to effect good governance in the past, other than to imply that the fault lies with recalcitrant directors, other executives, and auditors. This focus is consistent with most of the comment surrounding cor- porate malpractice. It is what we labelled thecult of the individual– a focus on the individuals, the consequence of which is to divert public attention from the systemic defects in corporate regulatory mechanisms – inCorporate Collapsey(Clarke et al., 2003, pp. 14–20).
35. It is worth noting how quickly after the HIH collapse Australia’s Federal Government set up the enquiry into Audit Independence, with what appears to have been absolute endorsement from virtually all parties interested in corporate affairs.
Perhaps it is not surprising that the necessity for auditor independence almost passed without dissent – what dissent there was arose more from differences of opinion regarding how to achieve it, and even more so, perhaps, regarding how to have it
appear to prevail. Submissions and evidence before the Joint Parliamentary Com- mittee enquiring into the Independence of Registered Company Auditors (Hansard www.aph.gov.au) reveal the common perception of how independence is to function as a governance mechanism.
36. The enquiry into terrorism shows how what might well be worthwhile activ- ities can become dysfunctional when they lack coordination. There seems to be some strong evidence from the 9/11 Commission in the United States, for example that the different intelligence and other agencies did not know what intelligence on terrorism and Iraq’s WMDs had been gathered by each other, were unsure of with whom they were to share intelligence, who ‘‘owned’’ the various bits of intelligence, who was following-up which leads, and the like. Corporate governance intelligence gathering and coordination seems to have malfunctioned in like fashion. ‘‘Who knew what’’
about HIH’s affairs prior to its collapse, and what actions were being contemplated, appear to have lacked any semblance of coordination.
37. It is interesting to note that the Senate Committee on CLERP9 in its Report No. 2 (June 2004) recommends that directors have greater obligations regarding the
‘‘true and fair view’’ criterion.
38. Though perhaps not for the same reasons, this proposition finds some con- sonance with the theme pursued byTurnbull (2004).
39. For a discussion of Alfred North Whitehead’s notion ofmisplaced concrete- nesssee,Fernside and Holther (1959).
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