Governance & the International Firm UniMelb 1 Governance & the International Firm Week 11: Transparency

Governance & the International Firm UniMelb 2 Learning Objectives n “Enron Ethics”? n What did we learn from Enron n Codes of Conduct n The relevance of transparency

Governance & the International Firm UniMelb 3 Enron

4 Enron’s culture n Partnerships at “arm’s length”? n FASB rule with respect to partnerships n Conflict of interest & financial implosion n Culture of Enron: –Innovation –Aggressiveness cleverness –Bending the rules to maximize profitability –Morality is merely an obstacle along max profitability

Governance & the International Firm UniMelb 5 Enron’s culture n SCHEIN’s mechanism that a leader can use to influence an organizational culture: –Attention –Reaction to crisis –Role modeling –Allocation of rewards –Criteria for selection and dismissal

Governance & the International Firm UniMelb 6 Enron’s culture n Enron was driven by personal ambition and greed to maximize individual wealth, leading to unethical & illegal behavior –Bad top management morality that became self- destructive –A well-filled CSR and business ethics toolbox can neither stop nor compensate for such self-indulgent processes n Enron “instrumentalized” ethical tools (CSR, Codes)

Governance & the International Firm UniMelb 7 Creative Accounting: Enron’s use of subsidiaries n The use of Enron’s subsidiaries was misleading the market: OSB SPVS n Basic corporate governance controls were bypassed by this creative accounting practices n Enron’s case resulted in Sarbanes Oxley Act

Governance & the International Firm UniMelb 8 Recommendation after Enron n Less emphasis on rules and more on principles: International Accounting Standards IAS n Creative Accounting n Creative Compliance = search for gaps in the law: focusing on the letter of the law instead of the spirit n What needs to be done? CSR & Reputation Risk Management = the key issue is really what companies are going to do beyond mere compliance with the law

Governance & the International Firm UniMelb 9 Recommendation after Enron n CSR = compliance with the law in spirit n What was “positive” about the Enron case: after Enron companies became aware about the importance of Socially responsibility and Legally responsibility

Governance & the International Firm UniMelb 10 Business Codes

Governance & the International Firm UniMelb 11 Survey on Business Codes n 3 types of codes: –Stakeholder stature72% –Values statement49% –Code of conduct46%

Governance & the International Firm UniMelb 12 Survey on Business Codes n A business code = an independent company specific policy document which delineates company responsibilities towards stakeholders and or employer responsibilities n Distinguish: –Company responsibilities towards stakeholders –Principles governing stakeholders relationships –Corporate values –Employee responsibilities towards the company

Governance & the International Firm UniMelb 13 Business Codes n Codes referring to: –Stakeholders responsibilities –Stakeholder principles –Corporate values –Internal employee conduct –Implementation & compliance

Governance & the International Firm UniMelb 14 Recommendation on Business Codes n Accountability n Feedback n A stimulating work environment n Periodic update n Clear status of the code n Availability of the code n Convincing message n Clear structure n Appropriate presentation n Unique identity