| By :
Joe Maldonado
Copyright (c) 2012 Joe Maldonado In "A Board Culture of Corporate Governance", Gabrielle O'Donovan defined corporate governance as: "An internal system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity, accountability and integrity". When corporate governance lacks unambiguous characterization, it is possible that fraud made its way in over the past decades but this is pretty unlikely. The exact place where fraud grows is the lack of integrity, objectivity and accountability inside a corporation. Corporate governance has a nice hierarchy. The top position is taken by Board of Directors and then comes the senior management and then the internal auditors followed by external entities as the last tier elements. The corporate governance policy can fail because of the weakest practitioner which can reside at any tier of the hierarchy outline. The question now is, "why does a corporate governance policy of a corporation fail"? Let us begin with the top level of the hierarchy. The Board Of Directors The board is actually responsible for framing the corporate governance policy of any company. So, if they come up with excuse that they are unaware of the policies or they won't follow the policy, it is completely unacceptable. However, this never means that there will be no fraud at the top level. Members of the BOD actually get engaged in fraud for a number of reasons which are mentioned below: - The board members are not selected on the basis of qualification. They are simply voted and selected to take charge of a position of power. So, it is possible that any voted member is not aware of or familiar with the business practices and thus, he or she can easily indulge in fraudulent activities without even being aware of the same. - Conflicting interests for the members of board can be another reason of fraud. Lack of integrity actually leads to conflicting interests. Senior Management Senior managers can also break governance policies. For instance, if a senior manager is given a quota of targets to fulfill and if the manager somehow feels that the target(s) cannot be achieved within the predefined time frame and this can put his or her job/career at stake, he or she may make unethical decisions, which under normal circumstances, would never happen. Yet another reason for fraud can come in if the management feels to be more loyal to the CEO rather than the company. A nice example can be cited to this. Towards the end of 1960's Quasar Stellar Company's upper management intentionally sent records to the mother company (Universal Nucleonics Company) which were falsified. The vice president of marketing, Mr. Peter Loomis was later interviewed where he openly accepted that he felt to be more loyal to his supervisor than the company! Situations like these can happen and this can lead to fraud. Internal Auditors These people see senior management more than the board of directors and hence, it has been found very often that friendship wins over governance policies. This hardly requires any explanation. It is because of this, better corporate governance policies need to be devised which can prevent, if not all, at least some failures, which in turn can maintain the integrity of the organizations.
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