Business Finance
Case study

Question Description

Minimum of 1200 word count with APA format and 3 references and in text citations. One is the book which will be uploaded. The case study this is referencing is on page 493 and the case study must be used, cited, and referenced. 3 questions each must have their own reference and citations.

Ferrell, O., Thorne, D., & Ferrell, L. (2016). Business and Society: A Strategic Approach to Social Responsibility & Ethics (5 th ). Chicago Business Press.

1. In a narrative format, discuss the key facts and critical issues presented in the case. Examine the existence of both cooperation and conflict between the government and AIG in 2008.

2. What role does corporate culture play in risk-taking and accountability? What about executive compensation? What other factors play a role in the accountability issues of AIG?

3. Compare the costs and benefits of regulation. In your opinion, do the benefits outweigh the costs or do the costs outweigh the benefits. What are the advantages and disadvantages of deregulation.

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CHAPTER THREE Corporate Governance Chapter Objectives ●● ●● ●● ●● ●● 74 To define corporate governance To describe the history and practice of corporate governance To examine key issues to consider in designing corporate governance systems To describe the application of corporate governance principles around the world To provide information on the future of corporate governance F I N D L E Chapter Outline Y , Corporate Governance Defined History of Corporate Governance S Corporate Governance and Social A Responsibility R Issues in Corporate Governance Systems A Corporate Governance Around the World Future of Corporate Governance 1 1 3 6 T S Opening Vignette Credit Suisse Experiences Corporate Governance Failure Credit Suisse is the first bank in more than a decade to admit to a crime in the United States. The company has been charged with conspiring to aid American clients in tax evasion. Government officials claim that hundreds of Credit Suisse employees, including managers, helped American clients evade taxes to the Internal Revenue Service by concealing funds, destroying records, and failing to accurately disclose financial information. Approximately 22,000 Americans had accounts with Credit Suisse, owning assets worth between $10 and $20 billion. The crime was discovered through an investigation involving 100,000 internal documents. Some of the documents revealed that Credit Suisse bankers had helped Americans evade taxes through such entities as secret offshore accounts. Such systemic misconduct demonstrates that Credit Suisse not only lacked effective risk management but was also deficient in its oversight responsibilities. Credit Suisse maintains that its internal investigation did not discover any leadership failures that led to the scandal. However, the Federal Sentencing Guidelines for Organizations (FSGO) clearly places the burden of knowledge on the company’s leadership. According to the FSGO, the board of directors and company leaders are responsible for maintaining an effective ethics and compliance program with internal control measures. This scandal seems to indicate a failure to have strong values and enforce the spirit of the F laws of the customers’ home countries. The U.S. government believes this guilty plea will I help demonstrate that nobody, even MNCs, is above Nthe law. However, the impact this will have on Credit DSuisse is questionable. In addition to its guilty plea, Credit Suisse must pay a fine of $2.6 billion and agree L to independent monitoring for two years. Although Ea guilty plea would generally mean that Credit Suisse would have to give up its investment-adviser license, Ythe Securities and Exchange Commission (SEC) has , granted the bank a temporary exemption. Some have called for the resignation of Credit Suisse’s American CEO for corporate governance failures. Others point to the fact that Credit Suisse is not being forced to disclose the names of American tax evaders. Credit Suisse claims that this is due to Swiss law, which has traditionally valued the privacy of clients. This brings up the issue of corporate governance in Switzerland. The laws of Switzerland regarding this issue are different than those in the United States, which makes it more difficult to effectively prosecute a Swiss company. Finally, critics have also accused U.S. law enforcement of a lack of governance controls, as they appeared less than eager to pursue the matter for many years.1 S A R A 1 1 3 6 T S 75 76 Business and Society B usiness decisions today are increasingly placed under a microscope by stakeholders and the media, especially those made by high-level personnel in publicly held corporations. Stakeholders are demanding greater transparency in business, meaning that company motives and actions must be clear, open for discussion, and subject to scrutiny. Recent scandals and the associated focus on the role of business in society have highlighted a need for systems that take into account the goals and expectations of various stakeholders, as the example of Credit Suisse’s guilty plea illustrates. To respond to these pressures, businesses must effectively implement policies that provide strategic guidance on appropriate courses of action. This focus is part of corporate governance, the system of checks and balances that F ensures that organizations are fulfilling the goals of social responsibility. I and policies are typically discussed in the Governance procedures context of publicly traded N firms, especially as they relate to corporations’ responsibilities to investors.2 However, the trend is toward discussing governance within many industryDsectors, including nonprofits, small businesses, and family-owned enterprises. L Corporate governance deserves broader consideration because there is evidence of a link between good governance and strong social responsibility.ECorporate governance and accountability are key drivers of change for business in the twenty-first century. The corporate Y misconduct at firms such as Credit Suisse, J.P. Morgan, and Walmart represent fundamental failures, in corporate governance systems that provide oversight. Investors and other stakeholders must be able to trust management while boards of directors oversee managerial decisions. In the most S recent recession, some of the nation’s oldest and most respected financial institutions teetered on theAbrink of failure and were either bailed out or acquired by other firms. Many problems in the financial sector come from R boards of directors allowing excessive risk taking. Acorporate governance and integrate the concept In this chapter, we define with the other elements of social responsibility. Then, we examine the corporate governance framework used in this book. Next, we trace the evolution of 1 corporate governance and provide information on the status of corporate governance systems in several countries. We look at the history of corporate gover1 nance and the relationship of corporate governance to social responsibility. We also examine primary issues3 that should be considered in the development and improvement of corporate governance systems, including the roles of boards 6 of directors, shareholder activism, internal control and risk management, and T we consider the future of corporate goverexecutive compensation. Finally, nance and indicate how strong S governance is tied to corporate performance and economic growth. Our approach in this chapter is to demonstrate that corporate governance is a fundamental aspect of social responsibility. Corporate Governance Defined In a general sense, the term governance relates to the exercise of oversight, control, and authority. For example, most institutions, governments, and businesses are organized so that oversight, control, and ­authority are Chapter 3 Corporate Governance clearly delineated. These organizations usually have an owner, president, chief executive officer, and a board of directors that serves as the ultimate authority on decisions and actions. The board of directors should have final authority on decisions, including the ability to approve corporate strategy, provide financial oversight, and even remove the CEO. Nonprofit organizations, such as homeowners associations, have a president and a board of directors to make decisions in the interest of a community of homeowners. A clear delineation of power and accountability helps stakeholders understand why and how the organization chooses and achieves its goals. This delineation also demonstrates who bears the ultimate risk for organizational decisions.FLegally, Sarbanes-Oxley and the FGSO places responsibility and accountability on top officers and the board of directors. Although many Icompanies have adopted decentralized decision-making, empowerment,Nteam projects, and less hierarchical structures, governance remains a required mechanism for D Even if a company has ensuring accountability to regulatory authorities. adopted a consensus approach for its operations, L there has to be authority for delegating tasks, making tough and controversial decisions, and balancing power throughout the organization. E Governance also provides oversight to uncover and address mistakes, risks, Y as well as ethical and legal misconduct. Consider the failure of boards at Enron and AIG to , address risks and provide internal controls to prevent misconduct. More recently, boards at J.C. Penney and J.P. Morgan have been criticized for issues such as failing to have a solid succession plan in place and not S exerting enough oversight to prevent misconduct. On the other hand, A the boards of Eaton corporate governance consultants have praised Corporation and Abbott Laboratories for strong benchmarking and R incentive pay systems.3 A system of oversight, We define corporate governance as the formal accountability, and control for organizational decisions and resources. Oversight relates to a system of checks and balances that limit employees’ 1 and managers’ opportunities to deviate from policies and codes of conduct. Accountability relates to how well the content of workplace deci1 sions is aligned with a firm’s stated strategic direction. Control involves the 3 decisions and actions. process of auditing and improving organizational The philosophy that is embraced by a board or6firm regarding oversight, accountability, and control directly affects how corporate governance T works. Table 3.1 describes some examples of important corporate governance decisions. S Corporate Governance Framework The majority of businesses and many courses taught in colleges of business operate under the belief that the purpose of business is to maximize profits for shareholders. In 1919, the Michigan Supreme Court in the case of Dodge v. Ford Motor Co.4 ruled that a business exists for the profit of shareholders, and the board of directors should focus on that objective. On the other hand, the stakeholder model places the board of directors 77 corporate governance Formal system of oversight, accountability, and control for organizational decisions and resources. 78 Business and Society TABLE 3.1 Corporate Governance Decisions Decisions Examples Ethical and legal risks Approve ethics and compliance program Regulatory financial reporting Audit committee oversees financial reporting Compensation Committee approves compensation for top officers Strategic Approves decisions related to strategies, mergers, and acquisitions Financial Major decisions related to the use of financial assets, including issuing stocks and bonds Stakeholder Decisions regarding employee benefits, shareholder F rights, and contributions to society I N in the central position to balance the interests and conflicts of the various constituencies. As we will D see, there should be no conflict between maximizing profits and maintaining L a stakeholder orientation. External control of the corporation includes government regulation but also includes key E stakeholders such as employees, consumers, and communities, who exert pressures for responsible Y conduct. Many of the obligations to balance stakeholder interest have been institutionalized in legislation that provides incentives for responsible ,conduct. It is not correct to assume that it is necessary to take advantage of or ignore stakeholders to maximize profits. There is much evidence that a stakeholder orientation maximizes profits in S the long run. By taking preventive action against misconduct, a company A should a violation occur. Top officers and the may avoid onerous penalties board of directors are legally responsible for accurate financial reporting, R as well as providing oversight to manage ethical decision-making. Today, A that ethical decision-making supports the most companies understand firm’s reputation and the cooperation of stakeholders. Therefore, the failure to balance stakeholder interests can result in a 1 failure to maximize shareholders’ wealth. Sometimes the issue is so major that fines and serious penalties occur as a result. For instance, Ranbaxy 1 Laboratories was found guilty of fraud and fined $500 million. Top man3 overridden corporate governance controls in agers were believed to have the company to commit misconduct ranging from providing inaccurate 6 financial information to selling adulterated drugs. In this case, the comT pany harmed not only shareholders but also customers. The board failed to stop the fraud, which was seen as a major corporate governance failS ure.5 Most firms are moving more toward a balanced stakeholder model, as they see that this approach will sustain the relationships necessary for long-run success. Both directors and officers of corporations are fiduciaries for the shareholders. Fiduciaries are persons placed in positions of trust who use due care and loyalty in acting on behalf of the best interests of the organization. There is a duty of care, also called a duty of diligence, to make informed and prudent decisions.6 Directors have an obligation to Chapter 3 Corporate Governance avoid ethical misconduct in their role and to provide leadership in decisions to prevent ethical misconduct in the organization. Directors are not held responsible for negative outcomes if they are informed and diligent in their decision-making. For example, the directors of General Motors (GM) must remain diligent in ensuring that financial reporting is accurate to the best of their knowledge. Manufacturing cars that lose market share is a serious concern, although it is not a legal issue. On the other hand, if the directors know that the firm is covering up a safety concern, then they can be held responsible. This means directors have an obligation to request information, research, and use accountants, attorneys, and obtain the services of consultants in matters where theyFneed assistance or advice. The duty of loyalty means that all decisions should be in the interests I of interest exist when a of the corporation and its stakeholders. Conflicts director uses the position to obtain personal gain, Nusually at the expense of the organization. Activist investor Carl Icahn called on eBay’s CEO John Donahoe to acknowledge a potential conflict ofDinterest involving at least two of the company’s board members. Icahn pressed for the company’s L payment service, PayPal, to be spun off from the core business since the E other payment service board members in question were involved with companies that directly compete with PayPal. While Y the board members assured Icahn that they are not involved in any conversations that put , they are associated in a themselves or any of the companies with which questionable position, the concern highlighted potential harm that can be done to investors if the conflict was not resolved.7 S Officer compensation packages challenge directors, especially those on A an opportunity to vote the board who are not independent. Directors have for others’ compensation in return for their own increased compensation. R Opportunities to know about the investments, business ventures, and stock A the duty of loyalty. market information create issues that could violate Insider trading of a firm’s stock is illegal and violations can result in serious punishment. Former portfolio manager at SAC Capital Advisors, Matthew Martoma, was convicted of playing an integral1part in an insider trading scheme that enabled the hedge fund to generate 1 profits and avoid losses of up to $275 million. He faced up to 45 years in prison (but was actually 3 Exchange Commission sentenced to nine years), and the U.S. Securities and is aiming to bar SAC Capital owner, Steven Cohen, 6 from the financial services industry for negligent supervision of portfolio managers.8 The ethical T and legal obligations of directors and officers interface with their fiduciary relationships to the company. Ethical values should guide decisions and bufS fer the possibility of illegal conduct. With increased pressure on directors to provide oversight for organizational ethics and compliance, there is a trend toward director training to increase their competence in ethics program development as well as other areas, such as accounting. Corporate governance establishes fundamental systems and processes for oversight, accountability, and control. This requires investigating, disciplining, and planning for recovery and continuous improvement. Effective corporate governance creates compliance and values so that 79 80 Business and Society employees feel that integrity is at the core of competitiveness.9 Even if a company has adopted a consensus approach to decision-making, there should be oversight and authority for delegating tasks, making difficult and sometimes controversial decisions, balancing power throughout the firm, and maintaining social responsibility. Governance also provides mechanisms for identifying risks and planning for recovery when mistakes or problems occur. The development of a stakeholder orientation should interface with the corporation’s governance structure. Corporate governance is also part of a firm’s corporate culture that establishes the integrity of all relationships. A governance system thatFdoes not provide checks and balances creates opportunities for top managers to put their own self-interests before those of important stakeholders.I Medical products distributor McKesson Corp. announced changes in corporate N governance at the behest of s­ takeholders. CEO John H. Hammergren’s compensation has been called into question D levels, and the restructuring addressed these for reaching unprecedented issues. The company reevaluated other aspects of governance and plans to L implement more changes in phases.10 Concerns about the need for greater corporate governance are Enot limited to the United States. Reforms in governance structures andYissues are occurring all over the world.11 In many nations, companies are being pressured to implement stronger cor, porate governance mechanisms by international investors; by the process of becoming privatized after years of unaccountability as state companies; or by the desire to imitate successful governance movements in the United S States, Japan, and the European Union (EU).12 As the business world A becomes more global, standardization of governance becomes important in order for multinational and international companies to maintain stanR dards and a level of control. A of major corporate governance issues. These Table 3.2 lists examples issues normally involve strategic-level decisions and actions taken by boards of directors, business owners, top executives, and other managers 1 1 Issues TABLE 3.2 Corporate Governance 3 Shareholder rights Executive compensation 6 Composition and structure of the board of directors T Auditing and control S Risk management CEO selection and termination decisions Integrity of financial reporting Stakeholder participation and input into decisions Compliance with corporate governance reform Role of the CEO in board decisions Organizational ethics programs Chapter 3 Corporate Governance with high levels of authority and accountability. Although these people have often been relatively free from scrutiny, changes in technology, consumer activism, government attention, recent ethical scandals, and other factors have brought new attention to such issues as transparency, executive pay, risk and control, resource accountability, strategic direction, stockholder rights, and other decisions made for the organization. History of Corporate Governance In the United States, a discussion of corporate governance draws on many F parallels with the goals and values held by the U.S. Founding Fathers.13 I As we mentioned earlier in the chapter, governance involves a system of checks and balances, a concept associated withN the distrib ...
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Final Answer




AIG Financial Crisis
Institution Affiliation



1. In a narrative format, discuss the essential facts and critical issues presented in the case.
Examine the existence of both cooperation and conflict between the government and
AIG in 2008.
In 2008, during the financial crisis, the government of America bailed the AIG
companies to save it from facing bankruptcy. The bail amounted to $180 billion in which the
government took control over the corporate (Thorne, Ferrell, & Ferrell, 2011). The two
leading causes of the collapsing included risky credit default swaps and the security lending.
Credit default swaps are generally considered as the financial tools that act as insurance
agreements that are on bond. In the case study, the AIG corporate was the insurance seller who
made it the bond owner. Due to market changes the corporate's default swaps did not ask for
collaterals are paid in full amount (Thorne, Ferrell, & Ferrell, 2011). For this reason, the
AIG corporate was accruing more and more unpaid debts. The problem arose when the financial
crisis inquiry commission which is an entity of federal government rated the corporate. The
FCIC found that the company found that the corporation owed a massive deal of money to the
Security lending is a form of financial transaction that involves borrowing of securities
and collateral submission. In the case study, the AIG corporate heavily invested in the highyielding but high-risk assets (Thorne, Ferrell, & Ferrell, 2011). The assets that the company
got involved include mortgage and subprime loans. The best alternatively method the corporate
was supposed to apply was investing in less risky and short-term investments. The main reason
why investing in such assets merely is that the securities' borrowers can terminate the contract
any given time they want. It becomes a problem ...

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