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Stakeholder Model Preventing Corporate Scandals Essay


Introduction

Today, we can clearly observe the ever increasing trend towards globalisation and the appearance of giant entities that are spreading their influence across different regions of our planet. This tendency can be noted in both political and commercial organisations who have become important actors within the modern world. The increased size of different corporations also means the appearance of numerous new opportunities to cooperate with new partners in different regions, and the potential to produce larger revenues.

This, at the same time, results in the increased power of corporations that manage to outperform their competitors and become the most powerful players in their sectors. However, there are several factors related to globalisation and increased importance along with the emerging power of different entities that need to be considered. The fact is that these processes also create the necessity for increased complexity and sophistication of the majority of processes crucial for the operation of a company (Chang 2009).

In this regard, their management becomes challenging and more difficult to control and monitor. As such, loopholes that could be used to perform various illegal actions appear. These, of course, could cause serious damage to a company, its owners, the community, etc., and this is why models that aim to help avoid problems of this sort have been created. The stakeholder model of corporate governance, with its co-determination institutions, is one of the ways to avoid corporate scandals and assure that a company will function within its legal framework. With this in mind, the main aim of this paper is the investigation of this model, its pros and cons, and the impact it has on the modern business environment.

Body

Background

The need for an efficient governance model became obvious after the scandal involving Enron. In the 2000s, Enron was one of the most successful companies, specializing in deals in electricity, natural gas, pulp and paper (Enron: the smartest guys in the room 2005). Its revenues accounted for around $101 billion in 2000, and the companys future seemed promising (Enron: the smartest guys in the room 2005).

However, after a chain of events, giant corporate fraud and mass corruption were discovered. The companys CEOs intentionally distorted data related to its losses and provided false financial statements to create the visibility of a stable and successful company. Sophisticated schemes, that included offshore zones and front companies, were created to hide losses and enable the companys managers to be able to maintain stable revenue.

Enrons bankruptcy became one of the most complex processes in the modern US business and legal environment and altered the future evolution of the business world greatly. Even though the company in general adhered to the principles of corporate governance, an agreement between top managers and CEOs created numerous issues relating to the efficiency of the approach. The discovery of such wide-scale corporate abuse made it absolutely necessary to make improvements in order to avoid such situations in the future.

Corporate governance

In general, corporate governance is a mechanism that organises the functioning of a company or organisation in a specific way. The main principles of the approach identify the distribution of rights, responsibilities, duties, etc. between the main members of a company (Sorge, Noorderhaven & Koen 2015). These could be CEOs, the board of directors, shareholders, auditors, regulators, and a number of other stakeholders who have a say over the functioning of a company (Dore 2006).

The model also assists in providing a better understanding of the main goals an organisation has at a given moment and helps to organise its functions in the most efficient way to guarantee that these goals will be achieved. It could also be considered an attempt to take into account the interests of all stakeholders and guarantee equal distribution of authority. At the same time, it also becomes a powerful monitoring tool which helps to ensure that a company functions within the legal framework as all participants are provided with detailed financial reports and other crucial operational information.

Co-determination

As the case of Enron clearly demonstrates, however, there are still some loopholes within corporate governance that enable individuals to use their authority to engage in fraud or other illegal activities; for example, if all members of a board or shareholders have an agreement to act in a certain way. For this reason, co-determination as the way to improve corporate governance and guarantee better monitoring of a companys performance has been introduced.

This practice provides employees within an organisation with a right to suggest certain representatives of the board of directors or vote for them. Moreover, work councils could also be created in the workplace to monitor the functioning of a company and preserve its status (Eidenmuller et al. 2016). The existence of this mechanism is very relevant in terms of the Enron scandal and its main participants cooperation to engage in illegal schemes. Co-determination practices decrease the probability of such situations as more comprehensive monitoring is introduced.

Stakeholders responsibilities

One of the main aspects that are often analysed and assessed by the above-mentioned mechanisms is the way stakeholders accomplish their main tasks and how they perceive their responsibilities. Enron’s case demonstrates that the abuse of power can result in wide scale fraud and corruption. It also comes from the outstanding responsibilities stakeholders have. With the corporate governance model and co-determination practices, enhanced monitoring of actions becomes possible. Stakeholders responsibilities encompass a wide array of actions and activities, ranging from formalities right through to overseeing the financial aspect of a companys functioning (Page 2012).

They also hold unique authority to make deals and determine the way a company will evolve, as well as having the responsibility for the accounting and preservation of the legal status of all activity (Lazonick & O’Sullivan 2000). For this reason, stakeholders responsibilities become a crucial element of any organisations functioning.

Role in the companys functioning

The role stakeholders play in a company cannot be overestimated. They could either totally destroy a company, as in the case of Enron, or, on the contrary, ensure its efficient functioning and guarantee that all laws which regulate the business world are observed.

For this reason, it is crucial to be able to monitor their functioning and be ready to introduce further alterations in case of any obvious manipulations with the budget or other crucial aspects of a companys functioning. Corporate governance and co-determination do not deprive stakeholders of their opportunities to impact an organisation. Otherwise, the mechanisms would not be efficient enough. However, they do ensure the comprehensive monitoring of their activities to avoid fraud or corruption. It creates a specific framework which guarantees a companys rise legally.

Corporate scandals

Corporate governance could also be considered a tool that could be explored to decrease the number of corporate scandals. As stated above, the Enron case impacted on the business world greatly. Intentional manipulations and false financial reports created by stakeholders and directors gave rise to numerous ethical concerns related to the nature of these actions and the possibility of their avoidance (Deakin & Konzelmann 2003).

In this regard, corporate governance becomes an approach that is expected to solve these problems. The existence of a constant monitoring tool, as well as numerous representatives suggested by workers, might prevent stakeholders from engaging in illegal actions and guarantee that the interests of a company will be preserved. Indeed, statistics seem to show that if the corporate governance model is applied, the number of scandals related to this issue decreases significantly (Koen 2005).

Stakeholder model

The shareholder model is one of the most efficient and topical models today that offers a solid approach to organising the operations of any company. While hierarchy and individual governance could be considered a good way to manage the company, there are numerous issues that also arise. The unlimited power of one person might result in a companys collapse or the opportunity for wide scale fraud. For this reason, corporate governance and the shareholder model offer a good alternative. The model presupposes equal distribution of power and responsibilities, crucial for the modern environment, and could help to preserve interests of all parties and avoid potential imbalance in the delegation of authority.

Advantages

The obvious advantage of the given model is its tolerant and democratic character. The same model can be observed at the state level where it is ruled by the government which consists of numerous representatives. In the case of a company, the presence of numerous shareholders will guarantee the interests of all groups will be taken into account and preserved. Another advantage of the model is its ability to decrease the probability of fraud by aligning an efficient monitoring system. All representatives are able to investigate the functioning of a company or his/her colleagues to assure themselves that the basic regulations are being observed.

Disadvantages

There are also several disadvantages that arise from this model. For example, it could be difficult to reach a consensus with regards any course of action, especially in the case that it presupposes some radical changes in the structure of a company, its functioning, or future perspectives. Equal distribution of power presupposes that all shareholders have the same rights and, therefore, they could promote their own solutions (Yglesias 2012).

For this reason, it could become difficult to come to a compromise and achieve the outlined goals. Finally, in accordance with the given model, shareholders could have too diverse responsibilities. That is why an individual with the final decision could be needed to solve complex issues and guarantee that the company will evolve.

Impact on the Business World

It is obvious that the creation and introduction of the given model has had a great impact on the modern world. Corporate governance, along with co-determination, has become the main practices to organise the functioning of giant corporations throughout the business world (Ryo 2016).

These widespread practices appear to have decreased the number of cases of fraud and financial manipulations of companies and new tools for monitoring have also subsequently evolved. Finally, previous corporate scandals gave rise to numerous ethical concerns. The shareholder model was expected to eliminate these and create the foundation for the efficient cooperation between all representatives and members of a director board (German lessons: co-determination and employees on boards 2013).

Discussion

There are numerous discussions relating to the prevention of corporate scandals such as Enrons and the role co-determination and the stakeholder model could play (The debate over the shareholder model of corporate governance n.d). It is crucial to realize the fact that the introduction of the model resulted in the significant decrease of the number of corporate scandals. Moreover, it also helped to create a clear and transparent framework needed for the efficient functioning, and future evolution, of any company.

Conclusion

Enrons case triggered widespread debate and touched upon a number of ethical issues related to the functioning of giant corporations. The financial manipulations performed by its CEOs ultimately resulted in the companys bankruptcy and the instigation of various criminal proceedings. A model that could help to decrease the probability of these actions in future should be introduced, and the shareholder model could be considered an appropriate method to solve this problem.

This model presupposes the cooperation between all shareholders who have equal responsibilities and duties. Moreover, co-determination is another practice that could help to improve the functioning of a company by providing workers with an opportunity to participate in its functioning and monitor shareholders actions via employees representatives.

The combination of these models is expected to create a transparent environment that could help to avoid scandals and ensure the observance of all laws. In this regard, it is possible to conclude that the co-determination institutions and the shareholder model of corporate governance offer an effective approach in preventing corporate scandals, such as Enron, and should be used today in all companies, throughout the whole business world.

Reference List

Chang, H 2009, 23 Things they don’t tell you about capitalism, London, Penguin.

Deakin, S & Konzelmann, S 2003, ‘After ENRON: an age of enlightenment?’, Organization, vol. 10, no. 3, pp. 583-587.

Dore, R 2006, Stock market capitalism, welfare capitalism. Japan and Germany versus the Anglo-Saxons, Oxford, Oxford University Press.

Eidenmuller, H, Habersack, M, Behme, K & Klohn, L 2016, Web.

Enron: the smartest guys in the room 2005, video recording, Magnolia Pictures, the USA.

German lessons: co-determination and employees on boards. 2013. Web.

Koen, C 2005, Comparative international management, London, McGraw-Hill.

Lazonick, W & O’Sullivan, M 2000, ‘Maximizing shareholder value: a new ideology for corporate governance’, Economy and Society, vol. 29, pp. 13-35.

Page, R 2012, Co-determination in Germany: a beginners guide. Web.

Ryo 2016, . Web.

Sorge, A, Noorderhaven, N, & Koen, C 2015, Comparative international management, Abingdon, Routledge.

. n.d. Web.

Yglesias, M 2012, Should workers be represented on corporate boards? Web.

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IvyPanda. 2020. "Stakeholder Model Preventing Corporate Scandals." November 15, 2020. https://ivypanda.com/essays/stakeholder-model-preventing-corporate-scandals/.

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