Over the past two decades, the investment world has seen a large number of scandals relating to companies which are attributed to failure of governance. These have been caused by a combination of number of factors, principally the three corporate sins (sloth, greed and fear) discussed in previous chapter, leading to such things as:
• Company Managers (principally the executive directors) lost sense of business or corporate ethics.
• Earnings became the prime measure of a company’s success or efficiency. Directors were not prepared to show low profits or losses. This led to use of unethical practices (like creative accounting, falsification of books, etc.) to increase or show higher earnings.
• Boards were generally ineffective and played into the hands of executive directors, approving improper financial statements and condoning unfair corporate decisions.
• Managers awarded themselves huge bonuses and stock options, often at the expense of the other shareholders.
• Companies concentrated on short term gains and showing higher current profits, often sacrificing the long term objectives.
• Auditors colluded with or failed to stop the executive directors from using improper accounting policies. In the process they lost their independence, which they surrendered for getting higher audit fees.
• The disparity in remunerations between the higher and lower echelons of employees grew to uncomfortable levels. A culture of greed developed among senior managers.
• Institutional investors and investment analysts fueled the already bad situation through pressurizing company managers first to make rosy forecasts and then tie to meet these forecast earnings or dividends in order to sustain market confidence. If the actual results did not measure up to the forecast figures, financial statements were fudged.
• Most small investors lost interest in long term investments and concentrated only on short term gains through share price movement.
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