Crisis in Corporate America

Business Faculty Experts Speak Out on Corporate Corruption

Eugene A. Imhoff Jr., the Ernst & Young Professor of Accounting, is an expert on the measurement and reporting of financial data, accounting quality, off-balance sheet financing schemes and the economic impact of financial statement disclosures. The author of two accounting textbooks, he has written current articles on "Accounting, Auditing and Corporate Governance" and "Stop Playing Games and Fix Accounting and Corporate Governance."

"For auditors to maintain independence from management, there is only one effective fix," Imhoff says. "Mandate rotation of auditors for all major publicly traded companies every three years. The auditor would be more inclined to exercise professional judgment when management is observed to be doing things that could be detrimental to the shareholders."

In addition, Imhoff says that four actions should be taken to address current governance weaknesses: do not allow the CEO to be chairman of the board for publicly traded firms; do not allow outside directors to hold stock options; establish a sub-committee of outside directors to nominate new board members; and initiate a continuing education requirement for all corporate board members.

Cindy A. Schipani, professor of business law, is co-director of Corporate Governance and Corporate Social Responsibility at the William Davidson Institute, located at the U-M Business School. Her primary research is in corporate governance, with a focus on directors’ and officers’ duties. She has written "Corporate Governance in a Global Environment: A Search for the Best of All Worlds," "The Purposes and Accountability of the Corporation in Contemporary Society: Corporate Governance at a Crossroads" and "The Role of the Corporation in Fostering Sustainable Peace."

"The accountability of corporate boards in corporate governance has evolved over the years," Schipani says. "Courts and legislatures often are caught in balancing acts. Historically, the challenge was to strike a balance between holding directors accountable to shareholders and not overly constraining their ability to perform their job. But these are not the only balances that need to be considered. Most states permit that in making certain corporate decisions officers and directors consider the welfare of other corporate constituencies in addition to shareholders.

"Once the facts of the Enron and other situations fully come to light, questions will arise not only about accounting practices and regulations but also about the role of the board of directors and its oversight function. Only time will tell how these issues will be resolved, but it wouldn’t be surprising to find the courts and legislatures strengthening the boards’ oversight function in an effort to promote more corporate accountability."

James P. Walsh, the Gerald and Esther Carey Professor of Organizational Behavior and Corporate Strategy, is an authority on corporate governance.  He has written about voluntary and involuntary corporate restructurings, executive compensation and turnover, and the social responsibilities of business.  He is the author of "The Purposes and Accountability of the Corporation in Contemporary Society: Corporate Governance at a Crossroads," "Corporate Raiders and Their Disciplinary Role in the Market for Corporate Control," "Misery Loves Companies: Whither Social Initiatives by Business?" and "People and Profits? The Search for a Link between a Company’s Social and Financial Performance."

"When nuclear plants blow up, planes crash and firms fail, we tend to blame human error," Walsh says.  "The world is a safer place if we can locate the source of a disaster in an individual’s mistake, poor judgment, or even wicked human nature.  While our recent business scandals have produced the usual rogues’ gallery of despicable individuals, our deepest fear is that our economic institutions are flawed in some fundamental way.  If so, all seems lost."

Walsh reminds us to keep our bearings during these times. "Before we all run off to cash out our mutual funds, we need to remember that our system of corporate governance, while not perfect, is the most flexible and effective in the world.  It has certainly served us well this past century.  The good news is that the reform process has already begun.  We will be fine if we take these scandals as a stimulus for improvement, and not as a cause for panic."

Gerald F. Davis, professor of organizational behavior and human resource management, is an expert on corporate governance---boards of directors, takeovers, acquisitions, divestitures, and institutional investor influences on management. He is author of "Stockholders, Ownership and Control," "The Small World of the Corporate Elite" and "Top Management, Company Directors and Corporate Control."

"Enron and WorldCom may be isolated instances of corporate governance gone bad, but their boards are not especially isolated," Davis says. "Enron’s directors served on the boards of 10 other Fortune 1000 companies across the United States, including Compaq, Eli Lilly, Lockheed Martin and Motorola. The directors of those 10 boards, in turn, served on another 49 Fortune 1000 boards.  Put another way, 95 directors served on boards with Enron directors, and 482 more directors are only two ‘degrees of separation’ from the Enron board. Among corporate directors, it really is a ‘small world.’"

Timothy L. Fort, associate professor of business ethics and business law, is co-director of Corporate Governance and Corporate Social Responsibility at the William Davidson Institute, located at the U-M Business School. He is author of "Doing Good Business: A Work Ethic of Quality and Dignity," "The Role of the Corporation in Fostering Sustainable Peace" and "Integrating Trends in Whistleblowing and Corporate Governance: Promoting Organizational Effectiveness, Social Responsibility, and Employee Empowerment."

Fort says that the current crisis "is about creating incentives for people to want to be ethical. Some people will do it on their own. Others need the threat of punishment, and criminal sanctions have a role to play in that. But, in addition, people do respond to wanting to do something that’s good. And it seems that in an awfully complicated world, executives ought to be able to see that the trustworthiness of our institutions, business as well as governmental, makes a difference to how the world views us. I think we’d enhance our security if executives were more ethical."

Gerald C. Meyers, adjunct professor of organizational behavior and human resource management, is a leading expert on corporate leadership and corporate governance.  The former chairman of American Motors Corp. also owns a consulting firm that provides counsel to senior management in crisis prevention and crisis management.  He is author of "When It Hits the Fan: Managing the Nine Crises of Business" and co-author of "Dealers, Healers, Brutes and Saviors: Eight Winning Styles for Solving Giant Business Crises."

An aid to bringing abusive CEOs down to earth, Meyers says, is to hold them accountable for special perks.  "Abusive CEOs and their CFOs know that requiring officers and directors to report as income (and pay taxes on) the value of their perks---fancy aircraft, chauffeured limousines, country clubs, free life and health insurance, extended vacations, New York crash pads, super-safe security systems and luxury travel for the family---would be sobering and would serve as a reminder that they are not gods, just people like the rest of us."

While corporate governance reforms are long overdue, he says, "it can be overdone and paralyze the system.  But we still have a long way to go to correct the abuses.  Another concern is that it opens the door for the vulture trial lawyers to swarm in to steal even more money from the shareholders over the carcasses of companies that they attack."

Anjan Thakor, the Edward J. Frey Professor of Banking and Finance and chair of the Finance Department, is an authority on corporate finance and financial intermediation. He has written "The Many Faces of Information Disclosure," "Corporate Control Through Board Dismissals and Takeovers" and "Becoming a Better Value Creator: How to Improve Your Company’s Bottom Line...And Yours"

"The scandals we are witnessing in corporate America today raise serious questions about corporate governance, and the independence and competence of boards of directors, even when these are outside directors," Thakor says. "Combined with failures of corporate governance, the old but important issue of the transparency and veracity of financial information has raised its head again. 

"The consequence is substantially reduced investor confidence and a much higher cost of capital for corporations. The significant recent increase in the yield spreads between corporate and U.S. government bonds is one piece of evidence in support of this. Reform will have to come in two arenas---corporate governance and financial reporting standards."

E. Han Kim, the Fred M. Taylor Professor of Business Administration, professor of finance and international business and director of the Mitsui Life Financial Research Center, is an expert on corporate capital structure and financing decisions, as well as on mergers and corporate restructuring. His current research on corporate governance and firm valuation worldwide shows that firms with higher quality corporate governance and greater disclosure of information have profitable investment opportunities, rely more on external financing and have ownership that is more concentrated.

"Firms with higher corporate governance are valued higher and invest more," Kim says. "However, the positive relationship between governance and valuation is weaker in strong legal regimes, such as the United States, where excessive regulation can be counter-productive.

"Strengthening regulation, though, may help invigorate emerging economies with malfunctioning legal systems, murky laws and weak enforcement for investor protection. But reforming legal systems takes time. A more pragmatic, intermediate approach would be to provide economic incentives to firms to improve their corporate governance. An environment conducive to generating profitable investment opportunities and to issuing new securities will provide the necessary incentives for firms to change."

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	The following University of Michigan Business School faculty experts are available to comment on corporate governance issues. If you’re in need of a source, please contact Bernie DeGroat at the U-M Business School's Office of Communications at (734) 936-1015 or by email.