Why has there recently been renewed interest in corporate governance? How can it be improved?

Question

What will be an ideal response?

Answer 1

When the CEOs of firms such as Enron, WorldCom, Tyco, and Adelphia were doing the things that got them convicted for fraud, their directors did not seem to be protecting the stockholders and other stakeholders by keeping an eye on senior management. Indeed, after the Enron and other scandals, there was a resumed interest in what is known as corporate governance, the system of governing a company so that the interests of corporate owners and other stakeholders are protected.

Perhaps the biggest problem in corporate governance concerns the independence of the directors. Inside directors may be members of the firm, outside directors are supposed to be elected from outside the firm. But in some companies, the outside directors have been handpicked by the CEO because they are friends, because they have a business relationship with the firm, or because they supposedly “know the industry.” In such instances, the board of directors may be too lenient on the CEO when he or she asks for leeway to pursue certain policies. Now more attention is being paid to strengthening corporate governance so that directors are clearly separated in their authority from the CEO. While directors are not supposed to get involved with day-to-day management issues, they are now feeling more pressure from stockholders and others to have stronger financial reporting systems and more accountability.