Sharmila Bose: CORPORATE GOVERNANCE - Ethics, Risk and Fraud

CORPORATE GOVERNANCE - Ethics, Risk and Fraud

ABSTRACT

The Corporate that is based on the shareholdings by the ownership. It has a complex governance since the owners are merely the shareholders which can be sold in tune of better profits or better options of investment. This complexity leads to ethical issues, risk and frauds in various forms through management strategies. This protects the interest of the corporation and its shareholders within the ambit of Capital Market. This dissertation will explore the corporate structure and the issues of risks and frauds which lead to the collapse of the corporate.

INTRODUCTION

The structure of the Capitalist economy which are mainly family owned private business houses and Corporate, which is 'economic-communism' are distinct. Their management approach, risk and fraud issues are also distinct. In the capitalist economy, i.e. private business that grows from the entrepreneur's vision and enterprising approach. However, in the corporate system since the investors are remote, they have their approach of outsource management to protect the interests of the shareholders and investors.

Elected by the shareholders, the board of directors is made up of two types of representatives. The first type involves ‘inside directors’ chosen from within the company. This can be a CEO, CFO, manager, or any other person who works for the company daily. The other type of representative encompasses ‘outside directors’, chosen externally and considered independent of the company. The role of the board is to monitor a corporation's management team, acting as an advocate for stockholders. In essence, the board of directors tries to make sure that shareholders' interests are well served.

This makes corporations mainly an investment scheme of Wealth Managers rather than the economic interest or building economic structure of any country. Corporation is the platform of the capital market for the investors and not the generation of the economy. This creates uncertainty in the investment in the Corporation and has the risk of change of management based on the shareholding. Even though the Corporate structure is well managed with the three categories, i.e., Chair, Inside Directors and Outside Directors. Inside Directors are responsible for the operations, however, the outside directors are meant to be vigilant about the function of the corporation.

Chair: Technically the leader of the corporation, the board chair is responsible for running the board smoothly and effectively. Their duties typically include maintaining strong communication with the chief executive officer and high-level executives, formulating the company's business strategy, representing management and the board to the general public and shareholders, and maintaining corporate integrity. The chair is elected from the board of directors.

Inside directors: These directors are responsible for approving high-level budgets prepared by upper management, implementing and monitoring business strategy, and approving core corporate initiatives and projects. Inside directors are either shareholders or high-level managers from within the company. Inside directors help provide internal perspectives for other board members. These individuals are also referred to as executive directors if they are part of the company's management team.

Outside directors: While having the same responsibilities as the inside directors in determining strategic direction and corporate policy, outside directors are different in that they are not directly part of the management team. The purpose of having outside directors is to provide unbiased perspectives on issues brought to the board.

This indicates that the structure of the Corporate is mainly to focus on the share value. The rise in the share value is the economic status of the shareholders and attracts the retail investors primarily. This results in negligence in the operations in tune of production quality, fair economic relations amongst clients, vendor and employee. This leads to excessive chaos that becomes the factors of risks and fraud. However, the ethics in the corporate governance is towards transparency in the policies, which is mainly to protect the image of the share value. This overrides the interest of the corporation or the economy of any country.

Corporate Governance & Ethics

There are many aspects of Corporate Governance and its ethics that are in tune with the relationship with the shareholders, stakeholders, the board and the company management. However, it is meta governance, the Corporate is to avoid economic warfare and information theft.

The latter include: the structural definition from the Cadbury Report, which identifies corporate governance as "the system by which companies are directed and controlled" (Cadbury 1992, p. 15); and the relational-structural view adopted by the Organization for Economic Cooperation and Development (OECD) of "Corporate governance involves a set of relationships between a company's management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined" (OECD 2015, p. 9)

However, there is no mention of ethical behavior with its workforce. Corporate Governance includes 4Ps in the system, which are people, process, performance, i.e. profit or purpose. The people are not the indicator of the workforce. The people are those who are the stakeholders of the Corporate in tune with the investment, vendor or clients, etc. That is why the highest layoff of the employees are in the corporate when it is in decline as we have witnessed in the IT sector. These larger layoffs were not in accordance with the ethical policies of Corporate where the livelihoods of the employees were dependent on the jobs in the sector. This indicates that the employees are not part of 4Ps in the corporate governance.

Ethical Corporate Governance refers to the processes and policies that a company has in place to deal with issues concerning how it is administered and conducts day to day business. It is important to remember that companies exist primarily to create a product or service, which is used to generate profit. However that intention must be balanced with controls that ensure a company pursues profit without crossing over the line into the realms of unethical behavior. In the past many companies may have exploited their market positions to inhibit competition or even threaten local populations, ethical corporate governance exists to prevent this happening. Corporate governance is a multi-faceted subject with many layers of complexity. An important part of corporate governance deals with accountability, fiduciary duty and mechanisms of auditing and control. Investors may only be concerned with a company's performance and earnings, but bad corporate governance can be symptomatic of greater problems with the company. For example, before the collapse of Enron, the company and its associated traders are believed to have artificially inflated the price of energy in certain US states, thus increasing their profit margins. While this action alone was not enough to cause the company to collapse it was a clear indication that internal controls had failed, which of course meant that other much larger abuses were possible, which eventually lead to the downfall of the company.

The expansion and corporatism of the government policies should come under the ethical corporate behavior. The corporatism of the agriculture has led to the farmer suicides where the farming have become a corporate with the shareholding of the investors. Further policies with the intent to maintain the high value of the share are keeping the status of the share for which much manipulation is done. These manipulations are in tune with the policies, manipulating the balance sheet and marketing of the share value image instead of doing a productive activity of the organization. Thus, most of the corporate policies are the expansion to sustain the share value in the market instead of upgrading the internal policies which lead to draining or leakage. The change in the management is according to the change in the Board after the change in the shareholding. Shareholding plays a significant role in policy making. This is another form of regime based on the lobby of shareholding and its governance system parallel to parliamentary democracy. In parliamentary democracy, people are political capital, however, in the Corporate system, share holding based on investment is the governance in the board.

Business ethics are policies that guide the behavior of corporate entities, especially regarding controversial subjects. Business ethics protect companies from legal liability and ensure that they treat their customers and team members with respect. Corporate ethics codes often include subjects like social responsibility, insider trading, discrimination, corporate governance and bribery.

The complexity in the Corporate governance is mainly the perspective of the Corporate in tune of capitalist economy versus the factual of economic communism. The Corporate has no accountability in tune of investment to the government or its liability of the tax payment. However, corporations do have social responsibility and funds for the non-government organizations that take care of the social issues of women, children and the environment. Corporate is also engaged in the political funding to the political parties for the election fund. This makes the corporate system distinct from any economy as it functions as a parallel state system. Just the way the Constitution is a doctrine of political governance, similarly, Corporate ethics is the doctrine from the corporate governance.

Enterprise Risks and Management

Business risk is any exposure a company or organization has to factor(s) that may lower its profits or cause it to go bankrupt. The sources of business risk are varied but can range from changes in consumer taste and demand, the state of the overall economy, and government rules and regulations.

Most of the time the risk factors emerge in any organization whether the profit or the non-profit organization is the policies and the approach of governance. Almost every crisis arises due to internal and external factors or policy inadequacies that bring challenges even to the survival of the business. This influences the profit and financial crisis and gradually loses its grip in the market and the reputation with the vendors and other stakeholders. Many times the disputes or violation of human rights and its legal consequences also create crisis in the business operation or it loses its stakes on the compensatory grounds.

Most of the business risks threaten the financial goal. However, such risks have many influences such as political change, cybersecurity threats, threat to the reputation of the owners or shareholders, merger or acquisition, location hazards. The Nandigram agitation against the Tata Nano project in West Bengal is the indicator of the political resistance. This caused a big loss on the investments and credibility of the project. However, the Tata Nano project was relocated to Gujarat. In such a situation the expansion of the project is also a tool of the political rivalries that is witnessed in the Tata Nano project. This impacted a huge reputation fallout for the Tata Group.

A lack of data security could be an internal risk, as it opens an opportunity for employees to leak data. This lack of security can also be an external risk for data breaches from outside sources.

Data leak as an internal risk is one of the crucial concerns which may lead to corporate war or international disputes. Espionage through the placement as employees breaches the data security. It could be in the form of intellectual property or any form of input that could benefit the rivalries. The data leaks could lead to financial frauds risks.

Another enterprising risk is the fixed workforce that became a huge liability that has been witnessed recently. Laying off 200,000 IT professionals in 696 tech companies is not a normal situation in tune with business risk. This either indicates the incompetence in the workforce or some lapses in the policies to use the workforce in tune of the competence in the market.

“In recent times, Indian companies have been grappling with the challenge of effectively utilizing their workforce, resulting in a significant rise in layoffs. According to a report from layoff.fyi, as many as 696 tech companies laid off employees in 2023, leading to nearly 200,000 tech professionals losing their jobs. This challenge arises due to the burden of fixed workforce costs that companies struggle with, irrespective of actual utilization. A key factor contributing to this crisis is the lack of efficient workforce planning. In the recent resurgence of the economy in 2021 and early 2022, companies engaged in over-hiring and talent hoarding without considering the long-term consequences. This trend, driven by expansion plans, seasonal demands, or target pressures, has resulted in an excess of redundant positions. As a result, businesses are faced with cash burn and narrow profit margins. Challenges such as constant attrition, fixed upfront salaries, and unpredictable outcomes further exacerbate the issue, squeezing profit margins even further.’

The random infiltration in the job sectors in the IT companies is a channel of the shareholders and the Boards that put their loyalist in the company. Most of them are either recommended or facilitated. In such cases the competence is compromised that leads to the collapse of the function of the organization. The background of the shareholders or investors are responsible for facilitating the placement. The channel of investment remains opaque and therefore the intent of the investors on the Board of shareholders remains under the risk threat since they control the governance. However, the foremost motto of the Corporate is to sustain the high share value. This motto compels many manipulations to be in the market of Shares and not the competence of the organization.

Enterprise risk management (ERM) is a methodology that looks at risk management strategically from the perspective of the entire firm or organization. It is a top-down strategy that aims to identify, assess, and prepare for potential losses, dangers, hazards, and other potentials for harm that may interfere with an organization's operations and objectives and/or lead to losses.

Enterprise Risk Management plays a significant role in identifying the crisis and the consequences of the issues. Most of the time the internal manipulation and corruption are the consequences of the risk in total. However, it can be dealt with a holistic approach. Most of the shareholding in the Corporate is benami or barter. In tune of that the corruption is a channel from the top since there is an intent to maximum grab the liquidation in the organization.

RISK MANAGEMENT FRAMEWORK

Effective risk management can add value to any organization. In particular, companies operating in the investment industry rely heavily on risk management as the foundation that allows them to withstand market crashes.

Here the risk is about the financial or investment risk. It is important to understand capital stability without hindering growth. Risk Management techniques lower the borrowing cost, easy access to the capital and long-term performance. In a way, the Risk Management Framework (RMF) allows the capital of the company to be less dependent on borrowing without the barricading performance and growth of the company.

There are five components in the Risk Management Framework, i.e. risk identification, risk measurement & assessment, risk mitigation, risk reporting & monitoring and risk governance. Risk Identification deals with identifying the risk from the Risk universe, i.e. IT Risk, operational Risk, regulatory risk, legal risk, political risk, strategic risk or credit risk. This is the diagnosis of the risk that the company is facing. Sometimes ignoring the risk of any framework does cause a larger crisis in the long-term which sometimes becomes irreparable.

Thus, the role of risk measurement comes to understand the parameter of the risk arising from the various components of the risk universe either collectively or identically. The parameter of the risk is identified from the spectrum of the exposure of the risk. Risk Mitigation is about analyzing the framework of eliminating or reduction of risk through sale of assets and liabilities, buying insurance or looking for options of diversification or diversities. Risk Mitigation can be said about finding solutions. The solution should be based on the spectrum of risk.

Risk Reporting and monitoring is an approach of risk administration. It is a regular feed that identifies the sources of risk on a regular basis. Daily reports of every department take the preliminary measures towards risk management. Risk governance is a complete human resources management that deals with the functioning of the organization. Every employee is a part of the governance and are meant to be within the parameters of their responsibilities and skills.

The organizations that are engaged in dealing with the Risk Management Framework are NIST, COBIT and COSO.

NIST Risk Management Framework (RMF) provides a process that integrates security, privacy, and cyber supply chain risk management activities into the system development life cycle.

COBIT is an IT governance framework for businesses wanting to implement, monitor and improve IT management best practices.

The COSO Enterprise Risk Management framework was published in 2004 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). It defines Enterprise Risk Management as “ a process, effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives

NIST and COBIT are specialized fields that deal with the risk in cybersecurity and IT management. However, COSO deals with the overall risk management that starts from the Board in applying strategies and policies.

Corporate Fraud

Corporate fraud consists of illegal or unethical and deceptive actions committed either by a company or an individual acting in their capacity as an employee of the company. Corporate fraud schemes are often extremely complicated and, therefore, difficult to identify. It often takes an office full of forensic accountants months to unravel a corporate fraud scheme in its entirety.

Every corporate fraud whether it is internally or externally happens since the law can be manipulated. The investor or the shareholders that are on the Board are either power players or close to power. Thus, it is easy to manipulate the legal process to have a bail out. Any corporation that gets into the clutches of law only due to the corporate war or dispute with the government. Corporations easily escape legal accountability since they do not pay tax. Corporate is a political economy of the political parties based on political sociology.

Most of the Corporate fraud is account misappropriation to project the high revenue status to maintain the share value in the market. It is done mainly to sustain the retail investors or to attract investors in the company. However, such misappropriation of accounting is distinct from the actual financial condition of the company.

Though it may be conducted in a variety of ways, corporate fraud frequently is performed by taking advantage of confidential information or access to sensitive assets and then leveraging those assets for gain. Fraud is often hidden behind legitimate business practices or exchanges to disguise illicit activity. Multiple stakeholders involved in corporate fraud also allow for elaborate fraud schemes to be protected by a group of complicit actors.

Corporate shares are mostly the barter system mainly by the misappropriation of the government policies and the corruption in the system. In tune with the alternate of the cash exchange, the allocation of the share through benami holders becomes the facilitation. In such cases, those who are into corruption using their positions in governance, are bound to misappropriate the corporation internally and externally. Most of the time the political influence uses the people to invest their money in the shares of other financial schemes. The trust of people in their political leaders makes their investment at stakes and subsequently they are controlled outside the board. Ponzi schemes are such examples of the financial misappropriation by the Corporate in the external frauds.

Another form of corporate fraud is espionage and stealing intellectual property towards the corporate war.

Corporate espionage can take one of two forms—by federal definitions—economic espionage and theft of trade secrets. Economic espionage is stealing trade secrets to benefit another country. This form of corporate espionage is very prevalent in modern times because of the advantages technological advancements bring to competing or struggling countries.

For example, in January 2023, a General Electric employee was convicted of attempting to steal avionics and turbine technology trade secrets from the company to give to the Chinese government and other interested parties. The ex-employee was sentenced to 24 months in prison, one year of supervised post-imprisonment release, and fined $7,500.

These thefts are state sponsored and have an impact on international relations and international legal remedies. Since communism is a global regime thus, it is not constrained in a country's domain. However, there are laws that protect the interest of such fraudulent practices through espionage or theft of trade secrets.

Bankruptcy fraud is a type of fraud that an entrepreneur commits by making their company go bankrupt, for example after they have deliberately incurred debts. Another example of bankruptcy fraud is that an entrepreneur deliberately disadvantages a creditor, for example by keeping certain assets or money secret in the event of bankruptcy. Fraudulent bankruptcy is punishable by law.

Another form of corporate fraud is bankruptcy. This could be either strategically or due to a false policy. However, it has been observed that the fall of corporate leads to the acquisition of the company and change in the management. These changes carry forward the total overhaul of policies and perspective of the organization. Since corporate is based on the shareholding, thus the bonding with the organization is only limited to the share value. This mainly leads to manipulation to either hold the value of the share or to attract the investors. Since investors are the public money, thus, the focus is on the sale of shares. However, the establishment of the company and its functioning towards economic alleviation of the region is generally neglected. Such manipulation becomes fraud in the definition of corporate governance.

But when bankruptcy results from corporate fraud, the message is troubling: If your company gains competitive advantage by deliberately misrepresenting its financial condition, it will effectively go unpunished in the capital markets.

Capital market is to compile the public money through the investment on share. Once the investment is done on the share market, the money stays in the market though it change hands through buy and sell shares of different companies. Thus, the capital market is the real control over the corporate governance and not the board. The board is under the influence of the strategies of the Capital Market and facilitates the policies such as financial frauds or accounting frauds to benefit the larger game plan. That is why such policies do not get punished by the market.

The costs of the deception and of cleaning up the mess have also been staggeringly high to the industry as a whole. Unable to match WorldCom’s low cost structure and aggressive pricing, competitors were forced to drastically cut expenditures by sacking thousands of employees. Top managers are reported to have suffered the same fate because they couldn’t match WorldCom’s high reported profit margins. A crude estimate suggests that if WorldCom had priced so as to earn what it reported, the industry could have yielded an extra $40 billion in revenue and commensurate profit. And the bankruptcy itself has been litigious and costly.

The collapse of any company that has public investment is at the risk of the investors and not the company. Thus, to manipulate the policies towards the corporate war or the competitors has the least effect on the financial accountability to the investors. Such policies help the board or the management to negotiate with the competitors in different forms towards the new policies in the industries or clearing the existing industrial disputes.

WorldCom emerged from bankruptcy, restructured, and was purchased by Verizon.

Thus the corporate restructure and go through the process of acquisition and change of management with new policies. Such acquisition is similar to the change of government in the political system.

OVERVIEW

The three main factors in Corporate governance are ethics, risk and fraud to be understood with the perspective of the formation of the Corporation. Corporation is created by the capitalist market and allocation of the fund to the corporation in tune of shareholding. The investment in the Capital Market through share trading is to circulate the money to benefit many business houses in tune with the financial support. However, such business houses are to attract the public money through the allocation of shares to the public instead of investing their personal money. This reduces the risk of investment for the private player and the onus goes to the public risk.

The ethic in corporate governance should be to keep the trust of the public investors or retail investors so that along with the company growth, investors can also grow accordingly. However, the risk is that when the pressure of the shareholders on the Board or the Benami shareholders try to manipulate the organization through espionage, corruption and fraud. Most of the projects by the Corporate are to deal with the secured business such as oil, electricity, water, transport, roads, etc.

Many times the risk in the corporate is faulty policies or incompetent workforce which are mainly the facilitation of the employment to its lobbyist by the shareholders on the Board. In such cases the holistic approach in governance is not able to reach the target of emancipation in the market since the workforce is divisive amongst the shareholders. This leads to excessive policy or strategy paralysis that subsequently become a risk for the operation. However, the intent of the corporation exclusive the share value is a narrow approach of corporate governance. Corporations are unable to create an economy for any domestic region, however, create strategies to attract investors through accounting manipulation and media propaganda.

Corporate is not the economy of any country. However, it is a forum to accumulate investment through the share market. In tune with that there are many corruptions or scams happening with public money, such as ponzi schemes. Share trading is based on the risk of the investors, there is no bailout for the investors who get stuck in the scam. The only way to punish the perpetrator, but the investor loses their money.

Many times, the investors' money are diversified in other projects that are possible to fall out for various reasons. This is a breach of trust to the investors that have invested in a particular project. Many times vendors' payments are blocked so that there can be diversified investment towards gain in the share market. In tune of that, the money flow gets affected and results in a blockage in the chain of procurement.

Ethics is not the behavior of the workforce or the operation technique here. The ethics is about the credibility of the market so that the investors are assured of its investment. Ethics is about the focus of the corporation where the public money has been invested. However, the quick switch over through sale or purchase of shares by the investors do affect the financial capacity of the organization.

BIBLIOGRAPHY

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