Ethics and stakeholder management

Ethics

Governance failures such as Enron could happen as a result of breakdown in agency. Management installs a board that is more sympathetic to its needs than the needs of the shareholders. Additionally, if the board does not have adequate financial expertise, they may not be able to identify fraud. Lastly, the external auditors for Enron failed in their duty to thoroughly understand the business. They did not exercise due diligence with respect to Enron's financials. This could be avoided in future by providing stricter guidelines for auditing practice, by installing independent board members and by enforcing the existing rules (Enron, for example, did not make the required financial disclosures to the SEC and was not punished for this).

There are several criticisms of Boards of Directors. One is that they are more aligned with the interests of management than they are with the interests of shareholders. Boards often have too many internal directors, which reduces board independence. Boards also often lack the necessary financial expertise to properly scrutinize a company's business. Of these the most important is that boards are not always aligned with shareholders. The board is intended to be an agent for the shareholders, yet the agency problem results when the interests of the board are more closely aligned with management. This renders the board to be more sympathetic to management, even if that comes at the expense of stringent governance and dedication to protecting the interest of the shareholders.