Corporate Governance in the US Group members; 1.Asif Salam 2.Saleem Shah 3.Mustafa 4.Ismail Shah 5.Momin Khan 6.Farid Kaskar

History and Background of country

From 1826 to 1910 NYSE were trading under stat laws with few s/holder 1929 market crash act as a corner stone for US CG  Separation of ownership from management  Security act 1933  Sec 1934 Investment company act 1940 Foreign corrupt practices act FCPA of 1980  Era of merger and acquisition

Make un lawful with in the US to offer are make payment directly are indirectly to foreign official Sarbanes oxly act of 2002

Laws, regulations and regulator

WHAT IS SOX? Legislative response Strengthen corporate oversight and internal corporate control Protect shareholders from fraud Long and complicated law Key provisions Section 302; section 302 of the SOX Act of 2002 is a mandate that requires senior management to certify the accuracy of the reported financial statement.financial statement

CONTINUED … Section 401; requires that financial information include disclosure about any relevant off balance sheet obligations they may exist. Section 404; requires information's to state whether or not the company internal control procedures are adequate and effective. Sections 802; Section 802 of the SOX Act of 2002 contains the three rules that affect record keeping. The first deals with destruction and falsification of records. The second strictly defines the retention period for storing records. The third rule outlines the specific business records that companies need to store, which includes electronic communications.

SECURITIES AND EXCHANGE COMMISSION - SEC Independent agency –Mission; –Enforce securities law passed by congress –Promote fair, orderly, and efficient securities market –Protect investors from abuses –Help maintain a well function economy

CONTINUED… SEC lawsuits Insider trading Accounting fraud Providing false and misleading information

► Do what you say...Say what you do.....!! ► Set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled ► Includes relationships among many stakeholders involved and the goals for which corporation is governed ► Stakeholders types: External: Shareholders, debt holders, trade creditors, suppliers, customers and communities affected by the corporation's activities Internal: Board of directors, Executives, Employees The United States Corporate Governance Code Thursday, December 01,

► Managersdidnotholdshareholderinterestsastheir primary focus ► Corporate managements represented “the corporation” rather than the share holders ► The goal of the firm not to maximize shareholder wealth, but to ensure the growth (or at least the stability) of the enterprise by “balancing” the claims of all important corporate “stakeholders” ► Raiders and hostile takeovers were relatively uncommon ► Internal incentives from management ownership of stock and options were also modest The United States Corporate Governance Code Thursday, December 01,

► Enron Scandal ► Dot Com Bubble ► Massive securities fraud and insider trading ► Unethical auditing processes A failure of corporate governance ??? New rules, new games The United States Corporate Governance Code Thursday, December 01,

► Rights of Shareholders ► Insider trading laws ► Role of stake holders ► Disclosure and transparency ► The responsibilities of the board The United States Corporate Governance Code Thursday, December 01,

► Common stock gives voting rights ► Common stock holders have right of taking net residual after liquidation ► Common stock can be traded adhering to SEC norms irrespective of the persons in concern ► All stocks give right of registration as shareholders of the company ► Voting can be in person or proxy ► For corporate equity securities, the shareholder registry is kept by the issuer or an agent of the issuer (called a "transfer agent") who affects transfers The United States Corporate Governance Code Thursday, December 01,

► Section 17(a) of the Securities Act,1933 prohibits fraudulent practices with the offer or sale of any security ► SEC Rule 14e-3, under Section 14(e) of the Exchange Act and Insider Trading Act,1984 (ITSA) permits the SEC to bring suit against anyone violating the Exchange Act by “trading a security while in possession of material nonpublic information." ► ITSA provides for penalties of up to three times the profits gained or loss avoided by the insider trading and authorizes a criminal penalty for insider trading of up to $100,000. The United States Corporate Governance Code Thursday, December 01,

► Stakeholders in a U.S. company may participate in corporate governance as shareholders (employee stock ownership plans) and through service as directors ► The rights of stakeholders are established by laws -labor law -contract law -insolvency law ► If the rights as established by these laws are violated, stakeholders can obtain effective redress through the courts and, in some cases, administrative agencies The United States Corporate Governance Code Thursday, December 01,

All of the following information must be disclosed by companies in the registration statements with the SEC ► The financial and operating results of the company ► Company objectives ► Major share ownership and voting rights ► Members of the board and key executives, and their remuneration ► Material foreseeable risk factors ► Material issues regarding employees and other stakeholders ► Governance structures and policies The United States Corporate Governance Code Thursday, December 01,

► Financials – as per US GAAP ► Mandatory disclosure of material non-financial information (IOSCo) ► Auditor must be independent of the company and should not have any business linkages or in an advisory position or any financial interest in the company ► Audit committees to include at least three members and be comprised solely of "independent" directors who are financially literate ► At least one member of the audit committee to have accounting or financial management expertise The United States Corporate Governance Code Thursday, December 01,

► A majority of independent directors ► Directors vacate their position on the board if their term of appointment expires, they resign or are removed by shareholders on a cause ► Vacancy is filled by vote of the board of directors, and the new director stands for reelection at the next annual meeting or when the term expires and a successor is elected, whichever is later ► Directors set their own compensation unless restricted by the corporation’s certificate of incorporation or bylaws ► Directors usually receive an annual fee or a per meeting fee plus expenses for their service on the board The United States Corporate Governance Code Thursday, December 01,

► Most actions by the board are taken by majority vote at formally noticed meetings ► Each director has one vote and is not allowed to vote by proxy ► Under state law, directors of a corporation are deemed to owe their corporations a fiduciary duty of care ► If any statement contains materially false or misleading statements or omits statements SEC may also bring an action against the directors and against the officers who signed the statement, mostly debarring further directorships The United States Corporate Governance Code Thursday, December 01,

Framework for CG

FRAMEWORK

Conversion and divergence

 A one size fits all approach is unrealistic, as alien practices cannot be transplanted or imposed  Mayer (2000) argued against corporate governance convergence suggesting that system should remain inherently different so as to promote competition and take advantage of comparative advantage  One size does not fit all  Legal frameworks vary tremendously across European union states

Biggest fraud in the US History The Madoff Scandal

INVESTIGATION REPORT CONTENTS What happened? Ponzi Scheme Timeline of events: –Bernard Madoff’s early life and career start-up –Madoff’s fame –Fraud exposed Aftermath of the fraud

WHAT HAPPENED? Bernard “Bernie” Madoff, aged 71 (at time of arrest). –A renowned (now notorious) stockbroker & financial advisor in Wall Street. –Founded Bernard L. Madoff Investment Securities LLC –Cheated ~$65 billion from investors in a Ponzi scheme. One of the largest fraud ever executed worldwide.

PONZI SCHEME

HOW THE INVESTMENT IS SUPPOSED TO GO Investor (client) Investment firm Company X Investor requests to buy shares from company X Stockbroker helps client purchase the shares Company X earns money. Investor sells shares via investment firm, gaining the profit from company X Investor earns money when company X earns money!

HOW A PONZI SCHEME WORKS “The Schemer” Madoff & his investment firm Investor 1 Investor requests to buy shares from company X ($1000 deposited) The $1000 is kept in an account and not invested Investor 2 Investor requests to buy shares from company Y ($1000 deposited) The $2000 is kept in an account and not invested Investor requests withdrawal of money and profit ($2000 paid to investor 1)

MADOFF’S FAME 1.Bernard L. Madoff Investment Securities help develop NASDAQ (2 nd largest stock exchange in the world). 2.Madoff Investment Securities was one of the highest performing market maker in Wall Street.

FRAUD EXPOSED- HARRY MARKOPOLOS Harry Markopolos had been trying to bust Bernard Madoff’s scheme for 9 years to no avail 1.Came across Madoff’s scheme when working for Rampart Investment Management. 2.Analyzed Madoff’s investment performance but numbers did not add up  knew that Madoff must be lying about his investment scheme. 3.Tried to persuade the Securities and Exchange Commission (SEC) that Madoff was a fraud  they ignored him. 4.Created 17-page report detailing evidence of the fraud to SEC  SEC investigated for a while before dismissing Markopolos’ claim.

FRAUD EXPOSED- MADOFF’S CONFESSION 2008 stock market crash lead to waves of people demanding withdrawal of their investment funds. Madoff’s scheme had more withdrawals than investors  not enough money to pay everyone. Madoff knew he can’t take the rest of the money and run. He decided to confess to his sons about the Ponzi scheme  his sons informed the authorities. Madoff claimed to have started the Ponzi scheme in the 1990s but no one knew for sure.

AFTERMATH Madoff’s reputation Sentenced to 150 years in jail. Treated like a Mafia boss in prison. Madoff’s family Madoff’s son, Mark, committed suicide. Peter, Madoff’s brother, sentenced to 10 years in jail. SEC’s reputation People lost faith in the SEC. SEC deemed as ‘incompetent’ and ‘needs fixing’. Sparked discussions about the need to educate SEC staff and lawyers about finance, economics and statistics.

REFERENCES Hilt, E. (2014). History of american corporate governance: law, institutions, and politics. Annu. Rev. Financ. Econ., 6(1), Hilt, E. (2014). History of american corporate governance: law, institutions, and politics. Annu. Rev. Financ. Econ., 6(1), Yakar, N. (2010). Evolution of Corporate Governance in the United States of America. SosyalBilimlerDergisi, (2), Yakar, N. (2010). Evolution of Corporate Governance in the United States of America. SosyalBilimlerDergisi, (2),