OECD Principles, Sarbanes-Oxley legislation and CSR

Seminar Paper 2011 24 Pages

Business economics - Business Ethics, Corporate Ethics


Table of Content

1. Introduction

2. Corporate Governance

3. The OECD Principles of corporate governance

4. The Sarbanes-Oxley Act of corporate governance

5. Discussion and evaluation of the OECD Principles and the Sarbanes-Oxley Act within the context of high-profile businesses

6. The significant Differences in focus and intend between OECD and Sarbanes-Oxley

7. Cadbury report

8. Greenbury Report

9. Corporate Social Responsibility(CSR)

10. The convergence of corporate governance and corporate social responsibility

11. Conclusion

12. Appendix1

13. Appendix 2

14. Appendix 3

15. Bibliography


In recent years, Corporate Social Responsibility (CSR) and Corporate Governance has been widely explored with a number of reports and codes of practice aimed at decreasing instances of what are seen as grossly unethical ways of managing major organizations. Quite apart from the strictures of moral theory, there is considerable danger to the reputation of quoted companies if shareholders feel that they do not believe the information presented to them by company directors and senior executives. Any general lack of confidence in the financial probity of companies could be very damaging to the economic system as a whole. If entrepreneurs and senior managers want unjustified large salary instead of paying attention to the wishes of shareholders, then conflict happened (Harrison, 2005). Thus, the developments of the Corporate Governance Codes like Cadbury Report, OECD principles, Sarbanes-Oxley Act etc have been driven by financial scandal, corporate collapse, or similar crisis. CSR has developed the idea of corporate governance in order to encourage management to take broader ethical considerations into their account. The introduction of corporate governance codes has been motivated by a desire for more transparency and accountability, and a desire to increase investor’s confidence in the stock market as a whole (Mallin, 2007). This essay presents a critical discussion of the OECD Principles and the Sarbanes-Oxley Act for corporate governance within the context of high profile businesses. Later, it will present the significant differences in focus and intend between OECD and Sarbanes-Oxley. Moreover, it will critically discuss the convergence of Corporate Governance and Corporate Social Responsibility (CSR).

Corporate Governance:

According to Shleifer and Vishny (1997), corporate governance deals with the ways in which suppliers of investment to corporations assure themselves of attaining a return on their investment. Moreover, a broader definition presented by the Organization for Economic Co-operation and Development OECD(1999), which describes the corporate governance as a set of relationships between its shareholders, other stakeholders and a company’s board. It also presents the arrangement through which the objectives of the company are set, and the meaning of attaining those objectives, and monitoring performance, are determined. In addition, Sir Adrian Cadbury (1999) said that Corporate Governance is concerned with keeping the balance between social and economic goals and between communal and individual goals. The aim is to line up as nearly as possible the interest of corporations, individuals, and society. Now we are going to discuss some important Corporate Governance code like OECD and Sarbanes-Oxley, Cadbury etc.

The OECD Principles of corporate governance:

The Organization for Economic Co-operation and Development (OECD) published corporate governance standards and guidelines in 1999( Mallin, 2007). The OECD recognizes that there is no single model of corporate governance that is applicable to all countries. However, the principles stand for certain common characteristics that are basic to sound corporate governance. The OECD principles were revised in 2004 ( Mallin, 2007). The revised principles are given in appendix 1. The OECD Principles are non-binding, and offer a reference for national legislation and regulation, as well as the guiding principle for stock exchanges, investors, corporations and other parties. The Draft revisions were developed through consultations over the past year involving governments and representatives from business, professional groups, labour groups, and civil societies in both OECD and non-OECD countries. The current OECD Principles include recommendations on high quality standards of audit and accounting, the self-government of board members, and the requirement for boards to act in the interest of the company and its shareholders (OECD Website, 2004).The new draft text sets more demanding standards in the following areas:

1) Investors should have both the right to appoint company directors and a more powerful role in electing them.
2) Shareholders should be able to express their observations about compensation for board members and executives and submit questions to auditors.
3) Institutional investors should reveal their overall voting policies and how they handle material conflicts of interest that could influence the way they use key ownership functions, such as voting.
4) Identifies the need for efficient protection of creditor rights and a competent system for dealing with corporate insolvency.
5) Calls on rating agencies, brokers, and other information providers that could manipulate investor decisions to reveal conflicts of interest and how they are being controlled.
6) Calls on boards to be more rigorous in revealing the related party transactions and defending so-called “whistle blowers” by allowing more confidential right of entry to a contact at board level. (OECD Website, 2004)

The Sarbanes-Oxley Act of corporate governance:

According to Duska et al (2011, p. 27)), “The Sarbanes-Oxley Act was designed primarily to regulate corporate conduct in an attempt to promote ethical behaviour and prevent fraudulent financial reporting. The legislation applies to a company’s board of directors, audit committee, CEO, CFO, and all other management personnel who have influence over the accuracy and adequacy of external financial reports.” Therefore, Sarbanes-Oxley act has transformed the basic structure of the public accounting profession in the United States. One of the most publicized aspects of Sarbanes-Oxley Act is that CEOs, CFOs are required to certify that quarterly and annual reports are compliant with applicable securities laws and present a fair picture of the financial situation of the company. The Sarbanes-Oxley also emphasize the auditor independence and strengthen the company’s audit committee ( Mallin, 2007).The act establishes a new regulatory body for auditors of US listed firms- the Public Company Accounting Oversight Board( PCAOB) with which all auditors of US listed companies have to register, including non-US audit firms. Moreover, companies are required to disclose in their annual report the fees paid to the “independent accountant” for each audit. In addition, there are also requirements relating to the rotation of audit partners such that the audit partner should rotate every five years, and after five year he/she cannot be the audit partner for that company. There are some benefits of SOX found after conducting different studies and those are presented in the appendix 2.

Discussion and evaluation of the OECD Principles and the Sarbanes-Oxley Act within the context of high-profile businesses:

Due to the lack of effective corporate governance practices, a number of high-profile corporate collapses have arisen. Now, we are going to discuss some of the high profile corporate collapses.

Baring Bank is one of England’s oldest established banks was collapsed during 1995 and was eventually bought by £1 by ING, the Dutch Banking and insurance group. This downfall brought by the action of one man, Nick Leeson, who is a clever trader with a gift for sensing the way, that the stock market prices would move in the far eastern markets. He was able to make a profit that was 10 percent of Barings’ total profit during 1993. Later, He incurred huge losses of Barings’ money due to earth quake in the Japan. Then, he requested more funds from Barings’ head office in London, which were sent to him and he incurred more losses after sending that money. The losses were £ 850 million which lead Baring Bank to collapse. (Mallin, 2007) If we evaluate the situation of Baring Bank, then we find that it was lacking effective internal control at that time. Therefore, the collapse of Barings Bank sent waves throughout financial markets across the world as the consequence of effective internal controls and appropriate monitoring was reinforced.

Enron was positioned in the USA’s fortune top ten list of companies on the basis of its turnover in 2000. However, Enron demonstrated a healthy profit of $979 million in the published accounts for the year ended 31 December 2000.Moreover, there was nothing obvious to alert shareholders to the future disaster that was going to unfold the next year or therefore, turning Enron the largest bankruptcy in the US history. The bankruptcy happened because of the difficulties related to its activities in the energy market and the setting up of a series of ‘special purpose entities’ (SPEs). Moreover, Enron used these SPEs to hide large losses from the market and to transfer funds to some of Enron’s directors. In October 2001, Enron declared a non recurring loss of $1 billion and it had to disclose a $1.2 billion write off against the shareholder’s funds. Later, Enron filed for bankruptcy in December 2001(Mallin, 2007). If we evaluate the situation of Enron, then we find that it needed for integrity in business: for the directors to act with integrity and honesty and for external audit firm to be able to ask to search questions of the directors without holding back for fear of offending a lucrative client. Moreover, Enron also high lights the need for independent non-executive directors who are experienced enough to be able to ask to search questions in board and meeting to try and ensure that business is operated appropriately.

In addition, Royal Ahold, a Dutch retail group with international interest, is the third largest food retailer in the world was referred as to ‘Europe’s Enron’. The financial scandals surrounding occurred by Royal Ahold unfolded during 2003. It declared that it overstated the earning of its US subsidiary by $500 million (Mallin, 2007). The reason behind this problem is that the chief executive was dominant and has a long service agreement; director’s remuneration was spirally upwards; its management had a poor reputation for their relations with investors. Therefore, directors were acting in a way that was detrimental to the shareholders. Finally, Royal Ahold has made sweeping changes to its corporate governance including the appointment of new independent board members.




Title: OECD Principles, Sarbanes-Oxley legislation and CSR