Corporate Paper) Furthermore, they define a material relationship as

Corporate governance has always played an important
role in the business environment as well as the economic environment.  A corporation’s processes affect
shareholders, management, customers, and the government. As a result, issues
such as the Enron scandal make it increasingly important to monitor these
processes to ensure they are both fair and honest. Since the 2001 downfall of
Enron, there have been several changes and policies implemented to monitor
corporations and to prevent further fraudulent activities. Improvements on
corporate governance are of the best interest of most corporate executives as
it could prevent major misfortunes for companies. Corporate governance has
developed a more concrete view over the years, as there have been more discussions
and further clarification on many issues. One of the most notable examples of
improving corporate governance is the Sarbanes-Oxley Act whose purpose is to
increase corporate disclosure of accurate company financial information.

 

One of the properties of the Sarbanes-Oxley Act is to
ensure director independence. Today, this remains one of the top priorities in
corporate governance. Steps have been taken to ensure transparency of corporate
governance and a framework has been developed for analyzing independence. The
Canadian Securities Administration defines director independence as “the
absence of any direct or indirect material relationship.” (6, CSA Consultation
Paper) Furthermore, they define a material relationship as “a
relationship which could, in the view of the board, be reasonably expected to
interfere with the exercise of a member’s independent judgement.” (4, CSA Consultation Paper) According to the Canadian
Securities Administration, the guidelines for independence are considered
voluntary, but are highly suggested when a company develops their own corporate
governance principles. These guidelines are intended to avoid confusion among
investors and corporations. Consequently, disclosure of said corporate
governance principles are mandatory. Full disclosure of corporations’ decisions
is extremely important for the shareholder, as they do not have the same access
to information as employees and board of directors. CPA Ontario has also
implemented rules on disclosure of various threats to independence, called Rule
204 or the “independence standard.”

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Investors should have all available information,
including but not limited to, director qualifications, relationships and reasoning
as to why members may not be considered independent. It is important for
shareholders to have full disclosure, as they may have a role in the election
of board members. NASDAQ’s corporate governance rules have changed since the
article’s release in the early 2000’s, but the general principles remain the
same. One of the most important changes is the increase in payments, which was
raised from $60,000 to $120,000 within twelve consecutive months, other than payment
for board services. NASDAQ also has stricter rules for Audit committee members.

They must follow the same corporate governance rules as board of directors, on
top of other more strict requirements.

 

This is a second stipulation of The Sarbanes-Oxley
Act, which calls for companies to reassess their internal audit procedures.

They need to ensure that they are in compliance with the expectations of
external auditors. By improving a company’s internal auditing procedures, we
can eliminate the amount of additional work for external auditors, making
audits more efficient. Audit committee members cannot have a direct or indirect
relationship with the corporation.            

They
must not have any additional financial interest than their agreed-upon
compensation for the performing the audit. This is so audits can be done
without bias or personal gain to alter findings. In the case of Enron, Arthur
Anderson had conflicts between the auditors and the audit committee and
therefore should have dropped the audit. Instead they continued despite their
lack of independence. Enron was providing revenue for audit, as well as consulting
fees in the millions, so Anderson had personal financial gain and incentive not
to drop them as a client. CPA Ontario has since implemented many rules and regulations
in regards to auditors under rule 204. Rules such as these do not only apply
provincially, but federally as well.

 

Thirdly, the Sarbanes-Oxley Act attempts to eliminate
the agency problem between management and shareholders. The agency problem is a
huge concern for investors because management may be taking on investments that
do not necessarily reflect the best interest of the investor. This could be by
avoiding risky investments to protect their name and reputation or taking on
growth investments as opposed to value investments. Corporate governance tries
to align the goals and interests of management and shareholders. This is
possible through an independent Board of Directors, as previously mentioned, who
has no interest in backing management’s decision if it is solely in the
managers own self-interest. During the Enron scandal, outsiders had very little
knowledge of what was really going on. It has been said that the board was not
acting independently and were aware of potential risks of certain transactions.

It is seems likely that they were highly compensated for their services in this
case. Since then, shareholder activism has been on the rise and shareholders
should be more aware of investment decisions as corporate governance becomes
more transparent. Shareholder activism allows shareholders to invoke their
rights to make changes within the corporation, such as making a change when
they do not agree with management’s decisions. By invoking their rights, they
can try to remove management or change corporate policies. Shareholder activism
keeps management accountable because they do not have the final say and must
keep shareholder interests in mind.

 

Social and environmental issues are also becoming
more important to shareholders and thus require more disclosure from
corporations on these issues. Many shareholders may choose not to invest in
companies who have negative environmental impacts, as environmental issues
become more of a concern for our planet. According to the Financial Post,
climate change, sustainability disclosure, pay equity and board diversity
accounted for a fairly large percentage of shareholder proposals at annual
meetings in 2017, totalling about 32% (“Environmental and social risk issues
top shareholders’ concerns: report”). Since social and environmental issues
have become more important, shareholder activism on sustainability has also
increased. Their investment interests have now expanded to include not only
political issues, but social and environmental issues as well. Therefore it is
important for companies to include shareholders’ opinions on these issues. By
being more open with this type of information, shareholders can better align
with management decisions by being fully aware of political, social, and
environmental issues. It remains important for shareholders to make use of
their rights so corporations can be held accountable for the impact of their
decisions, especially environmentally.

 

Although there have been many improvements since the
downfall of Enron, there is still much more to consider. The business
environment is constantly changing and corporate governance must change alongside
it. More meaningful disclosure should allow investors to have improved
information and therefore should allow them to make better decisions. The
ultimate goal of corporate governance seems to be clear, but the rules and
strategies can be quite different. Although fraudulent activities have not been
completely eliminated, there has been a significant decrease. Being that there
have been no larger scandals than Enron in 2001 confirms that corporate
governance is heading in the right direction. Corporate governance affects many
aspects in the business world and needs to move forward as the needs of shareholders,
management, customers, and the government evolve.