Does Corporate Governance Prevent Corporate Debacles?: A Comparative Analysis of the US and Malaysian Bankrupted Corporations

Does Corporate Governance Prevent Corporate Debacles?: A Comparative Analysis of the US and Malaysian Bankrupted Corporations

Haseeb Ur Rahman (University of Science and Technology, Pakistan), Saeeda Rehman (University of Science and Technology, Pakistan), Muhammad Zahid (City University of Science and Technology, Peshawar, Pakistan), Amin Jan (Universiti Teknologi PETRONAS, Malaysia) and Alam Rehman (NUML Peshawar, Pakistan)
DOI: 10.4018/978-1-5225-5541-4.ch011

Abstract

The renowned agency theory and thus most of the corporate governance (CG) regulations stress upon the independence of corporate boards and its various committees such as nomination and audit, among others. However, the review of the specific previous empirical literature does not fully support this public myth by unveiling that independence-related CG practices such as separate leadership structure, the majority of independent directors on the board, and independence of the nomination and audit committees could not escape the demise of Enron, WorldCom, and Global Crossing in the USA. Also, these CG practices could not avoid the fiasco of the Linear Corporation, Kenmark, and Sime Darby in Malaysia at the dawn of the twenty-first century. The review infers that despite a pivotal role, it is not only the independence of the board and its committees that avoid corporate failures. Overall, this review has important insights for governments, regulators, policymakers, corporate boards, stock exchanges, and shareholders of both the developed and developing countries around the world.
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Introduction

This chapter discusses whether regulations proactively reduce the chances or probability of corporate scandals and demises before their occurring. Also, the chapter confers whether regulations help to curb misconduct of management in a timely and effective way? Considering the high economic and social costs of corporate misbehaviors, the importance of these questions is further highlighted. It is estimated that monetary cost of frauds is worth US$ 380 billion per annum in large U.S. corporations (Dyck et al. 2014). The social cost in terms of confidence crunch associated with these scandals is even much higher (Giannetti & Wang 2016). In view of these, CG and other alike reforms are believed to prevent corporate misconducts through mitigating agency problems between management and shareholders and between majority and minority shareholders (Giannetti & Wang 2016; Rahman et al. 2017). Accordingly, it is assumed that strong CG regulations and their strict implementation ensure smooth functioning of corporations and economy of a country (Rahman et al. 2017).

CG refers to the system by which companies are directed, controlled and managed (OECD, 1999). It provides the structure through which companies set their objectives in a manner to ensure safeguarding the interests of key stakeholders. The history of CG can be traced back to the establishment of corporations in a sixteenth and seventeenth century. However, the subject of CG came into the limelight after the collapse of Penn Central in the USA in 1970 when the executives started to get control of the corporations (Cheffins, 2012). The establishment of Cadbury Committee in the UK in 1992 is considered a formal start towards CG voluntary regulations (Cadbury Committee, 1992). The committee that mainly stressed upon the independence of the board and its committees by requiring an increase in the proportion of independent directors therein not only led but also sparked the development and enactment of CG codes with a similar focus around the world. In Asia, the development of CG codes and regulations could be linked to the financial crisis 1997 that badly affected economies of the region. The crisis negatively affected investment in the region which necessitated the introduction and revision of CG regulations (Abdullah, 2004; Zhuang et al., 2000). Subsequently, many countries of the region including Malaysia introduced CG codes to respond the challenges posed by the crisis. Malaysia like other neighboring affected countries, issued its first CG code - Malaysian Code on Corporate Governance (MCCG, 2000) in 2000 (MCCG, 2012; Abdullah, 2004; OECD, 2011). By following the recommendations of Cadbury committee, most of these codes focused on strengthening independence in structure and composition of the board.

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