Corporate Governance Much Has Been

Corporate Governance

Much has been made of the debate between stewardship theory and agency theory as it relates to corporate government. Many say that agency-style theory is necessary because it's the only true thing that keeps corporations in check in terms of ethics and compliance with the law. However, the opposite side of the argument is that governmental at all agencies both over-regulate businesses in general and they over-react to corporate scandals and thus end up over-correcting with legislation that goes farther that it needs to or should. As with most things, the correct answer is surely in the middle as the proper rules of the game that no one should be strayed from and which also dictates how violators will be punished. However, the pertinent question that the researcher for this report shall strive to answer is which part of the spectrum between agency and stewardship theory the real answer falls. In other words, it needs to be defined when regulation is choking and obsessive and when it's not strong enough as there is happy medium somewhere in the middle that can and should be found.

There are a number of complicating issues that make the solution all the more evasive and it is very easy to play on people's emotions and passions when either the government or the corporate sectors around the world clearly go too far. Propagandist tactics and demagoguery in general is the coin of the realm at times and facts often get omitted, muddled or even over-written and lies and wild theories often take their place. The aim of this research is to dig through the minutia and cut through the careless (if not slanderous) rhetoric both against the government and against corporations and figure out where the happy center is at the end of the day. The research enters this with no bias and the proverbial chips shall be allowed to fall where they may and all that comes with taking such an approach.

Chapter II -- Background & Problem Statement

The United States is far from being the only hotbed for corporate malfeasance and avarice, but they do happen to be one of the better examples. Just looking at the last one to two decades reveals a number of scandals on a massive scale including the near-collapse of insurance giant AIG which required a government bailout, the constant red ink caused by government housing agencies Fannie Mae and Freddie Mac which have been bailed out both before and after the 2007-2009 housing crash in the United States, Enron and their traders' direct and intentional manipulation of energy prices while people were in the dark for no good reason, Kozlowski's purging of the Tyco bank accounts for his own personal and unfair gain and the list goes on and on (Dore & Singh, 2012)(Tung & Martin, 2012)(Verschoor, 2006)(Catanach & Ketz, 2012).

One of those scandals in particular revealed the dangers of both agency theory run amok and government entities not doing enough, and that was Enron. Just like 9/11 in the United States brought about the then-new agency now known as the Department of Homeland Security, one direct outgrowth of Enron and its aftermath was the legislation that has come to be known as the Sarbanes-Oxley act, often shortened to "SOX" (SEC, 2013). Many people have touted how much good the Sarbanes-Oxley Act has done but others have pointed to the sharp increase in compliance costs and the amount of time that is spent on seemingly mundane and/or non-vital business tasks just to keep government regulators at bay and many of the companies suffering due to this note that they are not an example of what the Sarbanes-Oxley Act was after and they are thus being punished for what was done or left undone by others. However, it was clear that something needed to be done and that the executives of these companies had to be held accountable for what they did. Enron was clearly actively concealing losses and willfully skewing energy prices for their own gains and they were still losing money hand over fist.

Nobody should take the above as a sign of singling out the United States. There have been similar scandals that have rocked the corporate and government sectors of countries like Australia, Great Britain, France, Germany, Spain, Portugal and even lesser developed areas like parts of Southeast Asia and Africa. Many countries in the developed part of the world are rife with graft with examples including Mexico. In short, if a company is rich with corporations there is a near certainty that corruption, bribery and other illegal acts are happening at least some places, if not a lot of places.

The root question to be answered for this study is how best to deal with is corruption without being punitive and unfair to firms that have not been convicted of anything and are indeed abiding by the law. However, taking a laissez faire approach to corporate governance, both mandated and just simply best practices, is less than wise as well and should not be done either (Skogstad et al., 2007). As noted above, it's how far between the two extremes the balance should be at and when (or why) it should shift in one direction or another.

The problem statement is that many governments are either too soft or too hard on the corporate world because the actions of a few isolated cases. The question to be answered is to how best regulate the market without being too lax and thus getting the best of both worlds, that being a market that is well-regulated but is not choked up with costly regulation costs that either have to be applied against profit margins or passed onto the customers and the latter happens the vast majority of time and there is little to no avoiding this dynamic. Regulations that are excessive can act as a tax to the consumer that they have little to no option to pay and many consumers are unaware of what is truly driving up their costs. However, corporations have to understand that there needs to be referees on the domestic and international playing fields. Otherwise, graft and greed would run wild and unchecked and this cannot be allowed to occur.

Chapter III -- Research Questions & Hypotheses

There are several research questions that will be answered as part of this study. They are as follows:

1) at what point does agency theory cause businesses to be stifled and more unwilling to invest and expand even with the conditions are otherwise ripe for it?

2) at what point is the government backing off on regulations too much to occur, meaning that the corporations exploit the lighter regulations from the government?

3) What are some good examples of the agency or stewardship theories going too far?

4) What facets of corporate governance should be left to the discretion and decision of the corporation rather than being mandated by a matter of law?

5) What should be the line between the government getting heavily involved or not in terms of employee size and/or gross receipts?

The first two questions are clearly built off one another as answering those two question establish the extreme ends of the "sweet spot" between over-regulation and under-regulation. The third question would drive the point of the first two questions home as they would show clear-cut real-world examples of what can go horribly wrong when corporations and/or governments go too far. It should be stated in no uncertain terms that governments can and do go far in regulation. Many people hold government up as a paragon of virtue and beyond making mistakes even if they are unintentional. However, as this research will presumably show, both major actors in this debate can go too far and the public actually has a role as well in keeping the proverbial law and order in that they can "vote with their wallets" and not spend money with a firm that is clearly doing wrong.

Chapter IV - Methodology

Qualitative vs. Quantitative

The methodology for this research will be as quantitative as possible but the researcher for this proposal and its ensuing report understands full well that a stark majority of the research for this report will have to be qualitative in nature. Even the quantitative data can be skewed and altered in such a way to paint a picture that it really does not, but the key will be to strive for a report that takes data, both qualitative and quantitative in nature, and meld it together whenever possible so as to show conclusions and data sets where the two types of data are saying the same thing. If there is a clear mismatch between what the qualitative data says and what the quantitative data says, then something is probably amiss with one (or both) of the data sets. To keep the data sets and analysis at least fairly narrow, the researcher shall focus on corporate governance in North America, which would include only the United States and Canada.

Reliability & Validity

The key will be to find reliability and validity. Reliability, of course, is the concept that if someone else does the same exact research in the same exact way, the research conclusions drawn will be close to if not entirely identical. Validity is similar in that the conclusions met have to be directly applied and ascertained based on the data that actually exists and not based on the exclusion of viable but clearly contradictory data and/or coming to conclusions that the data clearly does not support. For example, a study that makes a conclusion based on sheer numbers, rather than proportions and percentages of the relevant groups, is almost certainly flawed even if the conclusions drawn are certainly correct as that would be a clear validity problem. A reliability problem would be a study done in much the same nature but perhaps has different sources but comes to an entirely different conclusion. That itself can be tricky because if one study focuses on the United States and the other on Africa, the results would probably be very different. However, if they both focused solely on the United States and the conclusions drawn were entirely different, then somebody probably made a mistake somewhere in methodology and/or allowing bias to creep in (Drost, 2011).

This is a very valid concern as corporate governance has a disparate amount of viewpoints and theories and a lot of those theories can be (or most certainly are) drawn from political points-of-view like liberalism, libertarianism and conservatism. Many politically biased people have an unfair and/or unhealthy aggression towards government and government regulation but there are also many people that have the same animus towards capitalism and corporations in general. This report shall avoid the fray as much as is possible and will automatically discard any report, even one labeled as scholarly, that clearly has a bias against a given political party, governmental/corporate line of thought, etc. Instead, the author shall focus on data that is clearly drawn from facts and history because real-world history and current events are the best indicators as to what shall happen in similar instances in the future. Even the most well-run surveys have issues with data being unreliable (Ramo, Hall & Prochaska, 2012)(Kim at al, 2013).

Even with the conscious and unconscious tendencies to be biased or even sloppy, the research feels that this research will be engaged in with eyes wide open with a focus on what is real rather than what is not. The author of this report wants there to be full scrutiny and attention to detail applied to this report and the author is confident that it will pass such scrutiny with an eye towards bias and sloppiness with flying colors. However, the author is also not adverse to admitting that things were missed or done wrong but the author is going to avoid such neglect (and obviously any malfeasance) at all costs because doing otherwise would undermine the credibility and reputation of the researcher. A man or woman is what they do and a researcher that steals the work of others without citing, that is sloppy or intentionally misleading in their methods and so forth is not a good researcher and the researcher of this report-to-be is going to avoid such a condition at all costs.

Limitations

Going into this research, the research knows full well some of the limitations that will exist. The first is that economics and corporate governance in general is a giant behemoth of knowledge, research and data and even the best researcher is simply offering their best guess as to what truly happened and why. No single researcher can comprehend and verify every fact and no research is beyond reproach in terms of bias, attention to detail and general habits. However, a group of noble and well-minded researchers working in concert can do great things and the writer of this proposal wishes to be part of such a collective.