ENRON AND INTERNATIONALLY AGREED PRINCIPLES FOR CORPORATE GOVERNANCE AND THE FINANCIAL SECTOR

Abstract

Recent corporate scandals have led to a wide-ranging re-examination of standards for corporate governance with repercussions that extend to financial regulation and the key standards for financial systems which are a major component of current initiatives to strengthen the international financial architecture and include corporate governance as one of their subjects. This paper contains an account of the breakdown of corporate governance in the most baroque of recent scandals, that involving the collapse of Enron, where there were not only conflicts with standards for good corporate governance but also unusually extensive use of sophisticated techniques and transactions to manipulate the firm´s financial reports. Good corporate governance presupposes satisfactory performance not only on the part of auditors but also of other "watchdogs" or "gatekeepers" from the private sector such as credit rating agencies, lenders, investors and financial analysts. Their role in turn must be complemented by effective regulation, which in the case of a firm with operations as complex as Enron involves several different bodies. The paper documents the extensive failures of these different parties in the Enron case. This discussion serves as a backdrop to a discussion of policy initiatives in the aftermath of Enron´s collapse and other corporate scandals at the international level - most importantly the strengthening of the OECD Principles of Corporate Governance - and in the United States - where the response has included the far-reaching Sarbanes-Oxley Act whose repercussions will also be felt outside the United States owing to global importance of the country´s financial markets. The discussion also points to links between policy responses involving corporate governance proper and initiatives regarding international financial regulation. The paper also includes reflections on alternative models of corporate governance and of some of the implications of the weaknesses of the much touted United States model highlighted by recent scandals for the development and reform of corporate governance in emerging-market and other developing countries.