Cg and Financial Performance Relationship

1. EXECUTIVE SUMMARY

1. Project Title

An assessment of the relationship between Good CG and Financial Performance.

2. Objective of Study

The Enron scandal is the most significant corporate collapse in the United States during the 1980s. It involved conflict of interest between the two roles played by Arthur Andersen, as auditor but also consultant to Enron; the lack of attention of Board members to the off-books financial entities that did business with them; and the lack of truthfulness by management about the health of the company and its business operations. In certain ways, the culture of Enron was the primary cause of the collapse. The senior executives believed Enron is the best at everything it did and need to protect their reputations and their compensation as the most successful executives. They covered up the failures when the business ventures began to perform poorly. The scandal involved the ethics of its Directors, senior executives and its culture internally even Auditors externally. The Board members has not paid attention to how employees, customers and business partners are treat which these greatly affect the long-term value of the shareholders’ investment and leads failure of the venture. E.g. the stock option system is not the problem but if excessive in it and compensation give corporate executives, make too many incentives to manipulate the financial performance and stock price for rewards. This scandal demonstrates the needs and makes public alert the importance for reforms in accounting and CG and a close look at the ethical quality of the culture of corporations. Hence, the worldwide regulatory bodies have introduced more stringent rules (e.g. Sarbanes-Oxley Act) for governing the listed issuer so as to protect the investors’ interest.

By tightening the rules, it forced the Directors and executives to consider deeply before a decision is made. In return, this enhances the financial performance with an...