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An article titled “Corporate Governance: Risk Management Starts at the Top,” written by Yen Chong explores the “hit-or-miss approach” to corporate governance in the context of risk management (43). It also provides a brief assessment of International Accounting Standards as well as Basel II banking regulations.
Chong argues that corporate crashes such as the dot-com bubble, the WorldCom fiasco, and the Enron-Anderson collapse were caused by the status quo approach to executive behavior and market valuation of modern companies (Chong 43). He contends that financial damage that sometimes amounts to hundreds of millions of dollars could be ascribed to the inability of institutional monitoring systems to control the inadequate behavior of senior executives.
The author condemns a “finger-pointing” scenario that happens after every major corporate fiasco (Chong 43). He claims that an internal audit can change the tradition of shifting blame and issuing misleading annual statements. Moreover, non-executive directors can play a more prominent role in overseeing and monitoring operations of a company. Chong contends that the Enron-Anderson catastrophe was caused by unconscientious business practices exacerbated by an overly friendly relationship between the company’s director and an independent auditor (Chong 43).
Nonetheless, leaders are still being appointed by boards and monitored by oversight committees, opening a possibility for repeating previous corporate crashes (Chong 43). The author argues that mergers and acquisitions (M&A) could serve as an example of higher-risk decisions taken by CEOs. He brings examples of AOL-Time Warner and Vivendi-Messier fiascos to show that not all companies are able to reap the benefits of reduced costs from an M&A (Chong 43).
Chong goes so far as to say that the remuneration system that is currently in place creates an incentive for CEOs to pursue unwieldy M&As, thereby putting the long-term financial health of their companies at risk. Furthermore, the promising “glory of favorable media publicity” could instigate corporate managers to pursue short-term projects that offer immediate financial rewards and are likely to receive favorable PR (Chong 44).
Therefore, there is a need for making a distinction between excellent leaders from short-term-oriented executives looking for a quick gain. Chong contends that strategic threats cannot be managed or controlled by the set of regulations outlined in Basel II and International Accounting Standards (Chong 45). Only well-governed structures for detecting strategic errors could steer the process of corporate growth and implementation of other changes with minimum risk.
The author argues that the “phenomenon of hiring clones that end up failing the company” could be explained by the unwillingness of boards to hire people who do not fit the standard corporate template (Chong 45). The situation only gets worse because of the wrong incentives created by executive options and pensions, as well as CEO income that is separated from company performance.
Corporate executives and investors have different views of compliance regulations, such as FSA and International Accounting Standards. While the former protest about exorbitant compliance costs that put into risk implementation of additional performance monitoring procedures, the latter delight in their ability to make more calculated decisions related to the allocation of scarce resources.
According to Chong, despite the positive view of the system of corporate transparency by investors, it is not able to overcome many predicaments related to “financial health diagnosis” (Chong 45). Instead, he proposes to implement organic risk management methods for monitoring the performance of key managers. The author argues that Balanced Scorecard and other similar tools will help to maintain a balance between short-term performance and long-term financial health of a company.
Chong, Yen. “Corporate Governance: Risk Management Starts at the Top.” Balance Sheet 12.5 (2004): 42-47. Print.