Business Horizons (2009) 52, 545—552

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EXECUTIVE DIGEST Recurring failures in corporate : A global disease?

Nandini Rajagopalan a,*, Yan Zhang b a Marshall School of Business, University of Southern California, Los Angeles, CA 90089-0808, U.S.A. b Jesse H. Jones Graduate School of Management, Rice University, 6100 Main Street, Houston, TX 77005, U.S.A.

1. India’s Enron? Satyam Computer’s fictitious cash deposits, misstated accounts receiv- billion-dollar corporate fraud ables and accounts payables, understated liabili- ties, and overstated assets; these falsities only On January 7, 2009, B. Ramalinga Raju–—founder cametotheforewhenRajutriedtobuytwoother and chairman of Satyam Computer Services, one of firms owned by his family. Shareholders revolted India’s largest and most respected software and IT against the acquisition proposal because they services companies–—admittedthat he had commit- viewed the planned purchases as attempts to prop ted India’s biggest corporate fraud, having manip- up other failing family businesses by siphoning cash ulated the company’s income statements, cash out of the profitable software firm. flows, and balance sheet for more than 7 years. Even before the Satyam scandal erupted, Indian The $1.47 billion fraud on the Satyam (meaning shareholders had already lost more than $2 billion truth, in Sanskrit) balance sheet included over- from corporate frauds and bad governance since stated revenues and profits, acts that were perpe- 2003 (‘‘Corporate India’s Governance Crisis,’’ trated by the founder and his brother, the 2009). In a January 7, 2009 report issued by an company’s CEO, to attract more business and analyst at one of India’s leading investment houses, avoid any possible hostile takeover. ‘‘It was like only 4 out of 68 Indian companies were found to riding a tiger, not knowing how to get off without adhere to ‘‘highly desirable’’ disclosure standards; being eaten,’’ Mr. Raju wrote in his confession more than half the companies on the list that did statement (‘‘India’s Enron,’’ 2009). Prior to this not make the grade were well known firms with turn of events–—which resulted in the arrests of the significant global presence (‘‘Corporate India’s chairman, the CEO, and the CFO of the company, Governance Crisis,’’ 2009). and pending criminal indictments as well–—Satyam had been widely recognized for exemplary corpo- 2. China’s toxic milk scandal: rate governance, and Raju hailed as a role model Negligence or criminal intent? for successful business and entrepreneurship. The founder and his co-conspirators reported In September 2008, the Sanlu Group–—maker of one of the oldest and most popular brands of infant formula in China–—was charged with a heinous * Corresponding author. E-mail addresses: [email protected] act: the company was alleged to have added the (N. Rajagopalan), [email protected] (Y. Zhang). toxic chemical, melamine, to its baby milk powder

0007-6813/$ — see front matter # 2009 Kelley School of Business, Indiana University. All rights reserved. doi:10.1016/j.bushor.2009.06.007 546 EXECUTIVE DIGEST in effort to boost the mixture’s protein content. By paid $34.4 billion to its employees in 2007, but is the time of the discovery, Sanlu’s contaminated now valued at just $18.1 billion. The most outra- baby milk powder had affected nearly 294,000 geous case is probably AIG, the insurance and finan- Chinese infants, and killed 6. Sanlu, which is 43% cial services giant: it lost $61.7 billion in the fourth owned by New Zealand’s Fonterra, received a bank- quarter of 2008 and received more than $170 billion ruptcy order from a Shijiazhuang Court in December in federal bailouts. However, AIG paid over $165 2008, and four of its top executives were given long million in bonuses to executives by March 21, 2009 as prison sentences in January 2009. Under the Chinese part of a total payout of $450 million. These highly Civil Servants Law, which took effect in 2005, and visible and notorious examples have reinforced the the State Council Regulations on the Punishment of public perception that banking is simply a ‘‘gravy Civil Servants of Administrative Organs, enacted in train’’ for employees (‘‘Attacking,’’ 2009). 2007, heads of administrative bodies who fail to While the specific form of fulfill their duties and cause serious problems that failure, the magnitude of the fraud, and the final could have been avoided face removal from their effects on employees, customers, or shareholders jobs and other, more severe, punishment. Indeed, may be different across these three national con- several senior government officials in China have texts, what is common is the frequency of occur- been brought down by the scandal, including the rence of large-scale breakdowns in corporate head of the General Administration of Quality governance in both developed and developing eco- Supervision, Inspection, and Quarantine (AQSIQ). nomies. Understanding why these failures recur, and Milk powder from 22 other Chinese companies the intended and actual effects of proposed gover- tested positive for melamine, too, with Sanlu’s nance solutions in each of these contexts, is a product at the top of the ranking. Apparently, add- worthwhile exercise–—even if it only serves to illu- ing melamine to increase the protein content of minate the complexity and magnitude of challenges dairy products had been an industry-wide practice. confronting regulators and governments keen to Some of the affected companies issued recalls of restore confidence in their country’s corporate their dairy products, and other countries began sector and financial markets. testing Chinese dairy products or removing them from stores. The scandal decimated Chinese dairy exports, and re-exposed long-standing concerns 4. Why do governance failures occur? about food security, , and lack of political checks and balances (Wikipedia, 2009). 4.1. Governance failures in the United States

3. U.S. financial giants’ questionable Roe (2005) traces the recurring breakdowns in conduct: Executive payouts American corporate governance to two core and enduring instabilities in the American governance Since mid-2008, the U.S. banking industry has been context: (1) the separation of ownership and in the deepest recession since the Great Depression control, with ownership resting with distant and of the 1930s. While investors have borne the bulk of diffuse shareholders while control is exercised by the losses and taxpayers have shelled out trillions of hired managers; and (2) a decentralized and porous dollars to keep financial giants afloat, executives regulatory system, in which multiple regulators with and employees of these banks appropriated dispro- partial authority contribute to a flexible, special- portionate shares of the profits when the market ized, and comprehensive regulatory framework was booming (‘‘Bank Incentives,’’ 2009). In the 3 while there is no single, unified regulatory agency years prior to its collapse, Bear Stearns paid $11.3 that oversees the disparate regulatory efforts and billion in employee compensation and benefits, resolves potential conflicts and inconsistencies while its shareholders only received around $1.4 across regulatory agencies. These two core attri- billion of J.P. Morgan Chase stock–—currently worth butes of the United States governance framework only half of that amount–—after its fall. Lehman have obvious strengths, but they are also beset Brothers distributed $21.6 billion in the 3 years by weaknesses that come to the fore each time before 2007, while its shareholders got nothing U.S. corporations and stakeholders experience because the company went bankrupt. Merrill Lynch a governance crisis. paid staff over $45 billion during the 3 years prior to For instance, the separation of ownership and 2007, but its shareholders got shares in Bank of control are acknowledged as facilitating significant America that are now worth just $9.6 billion, less economies of scale in the operation of large than one-fifth of the original offer value. Citigroup firms, the hiring and retention of highly qualified EXECUTIVE DIGEST 547 managerial talent, the ease of entry into and exit failures witnessed in developing nations like India from markets, and the availability of capital to meet and China stem not from the separation of owner- the financing needs of entrepreneurs and start-up ship and control, but from the concentration firms, and so on. However, on the down side, this of ownership and control within state-owned, separation exacerbates the problems posed by in- public-sector units, or family owned businesses, centive misalignment, self-serving behaviors pur- and from the pyramidal ownership structures that sued by managers, entrenchment of powerful dominant shareholders use to achieve greater managers who may lack the skills and knowledge control of the firm (Rajagopalan & Zhang, 2008). to manage in changing environments, and so forth. For instance, in India a majority of the largest com- Indeed, Roe argues that the separation of ownership panies are family owned, and their founders–—for and control explains the recurrent breakdowns the example, as in the Satyam case discussed earlier–— United States corporate sector and financial mar- often exercise control to such an extent that they can kets have witnessed over several decades, including misstate financial reports and create shadow compa- the problems associated with hostile takeovers and nies through complex cross-holdings that deal with failure of competitive forces in the 1970s and 1980s, one another in financially dubious and even poten- insider trading in the 1980s, excessive executive pay tially illegal ways (‘‘Corporate India’s Governance in the 1990s, and the collapse of Enron and other Crisis,’’ 2009; Rajawat, 2009). In China, the govern- corporate giants in the 21st century. ment controls about 70% of the stakes of publicly The porous and decentralized regulatory struc- listed companies in the Shenzhen and Shanghai Stock ture, on the other hand, poses challenges that serve Exchanges, and most business people believe that to restrain the power of regulators and the effec- corruption, especially bribery of government offi- tiveness of governance reforms intended to check cials, is a necessary condition and a norm for con- egregious corporate conduct. Managers of large ducting business (Rajagopalan & Zhang, 2008). firms and their auditors and accountants can influ- In both countries, the fundamental problem of ence both the formulation as well as the implemen- concentration of ownership and control in the same tation of regulations and laws through lobbying the hands is further exacerbated by: (1) the lack of SEC, preemptively litigating, influencing Congress incentives for firms and their managers to imple- through elected representatives, and so on. In sum, ment governance reforms, (2) underdeveloped these fundamental characteristics of the gover- external monitoring systems and weak regulatory nance system result in instabilities that can never agencies, and (3) a shortage of qualified indepen- be solved once and for all; instead, each crisis leads dent directors. While India’s formal financial report- to a specific set of solutions that are intended to fix ing standards essentially meet international the immediate problems, even though the next standards for and , breakdown is inevitable given the inherent instabil- and its principal regulator–—the Securities and Ex- ities of the underlying system. While Roe’s conclu- change Board of India–—is set up to be independent sions are quite alarming, and some may disagree of the government (‘‘Bank Incentives,’’ 2009), en- that governance breakdowns are inevitable, it can- forcement of governance laws is often weak and not be disputed that for all practical purposes it is characterized by significant loopholes. Political con- impossible to design a fail-proof governance system nections also often undermine the independence that conserves the benefits of separation of owner- and will of enforcement agencies (‘‘Did SEBI,’’ ship and control and decentralized regulation while 2009). In other words, while the United States preventing the abuses of power and privilege that governance context needs to deal with the chal- inevitably accompany these institutions. Interest- lenges posed by a decentralized and porous regula- ingly, the governance failures in developing world tory system, developing countries lack a regulatory contexts, including the examples discussed earlier structure with the political will and judicial support from India and China, cannot be attributed to either to enforce reforms that are enacted. separation of ownership and control or decentral- ized regulation, because neither of these factors exists in these countries to a degree that they can be 5. Governance reforms: Why don’t blamed for recent acts of corporate fraud. they work?

4.2. Governance failures in India and 5.1. Recent reforms in the United States: China Mixed evidence on their effectiveness

In contrast to the problems that underlie the gover- In the wake of Enron and other major scandals in nance context in the United States, the governance the financial sector that contributed to the recent 548 EXECUTIVE DIGEST

financial meltdown and ensuing global economic incentive to manipulate the options grant dates, crisis, the United States government and regulatory leading to the corporate fraud of stock option back- agencies have focused on enacting new laws, such as dating. In a recent stock option backdating case, a the Sarbanes-Oxley Act of 2002, and developing a firm picked a past date when its stock price was broader range of stricter monitoring and enforce- particularly low to be the stock option grant date, ment mechanisms. These mechanisms are intended and thereby increased the value of the stock options to not only generally align managerial interests with (Heron & Lie, 2009; Lie, 2005). Heron and Lie (2009) those of shareholders, but also to ensure greater and estimated that 13.6% of all option grants to top more complete transparency in financial account- executives during the period 1996—2005 were back- ing, to increase the accountability of executives and dated or otherwise manipulated. directors for reckless and irresponsible risk-taking Indeed, some have argued that equity-based that results in significant losses to shareholders, to compensation is partly responsible for the recent deter potential frauds, and to allow more effective meltdown of the financial sector. The base pack- apprehension and prosecution of the perpetrators of ages, including pay and bonuses, for executives in these frauds. the financial sector were sufficiently large to make A quick review of the most common safeguards them feel financially secure. That gave bankers a in place, however, reveals significant disconnects license to gamble their equity-based pay in hopes of between the intended benefits and realized ef- earning the huge payouts that would take them into fects, and many of these gaps can be attributed to the ranks of the u¨ber-wealthy (‘‘Bank Incentives,’’ the two fundamental instabilities of the United 2009; ‘‘Attacking,’’ 2009). States governance system discussed earlier in this article (Roe, 2005). On the one hand, managers 5.2. Governance reforms in India and who control a corporation are inevitably in a bet- China: Failures in implementation ter position to manipulate governance mechanisms to promote their own economic well-being, often As noted in the previous section, the contexts in exploiting legal loopholes, and the dispersed India and China pose different challenges compared shareholder base can do little to prevent such with the United States and other advanced econo- abuse. On the other hand, decentralized and mies when it comes to governance failures. This is ‘‘siloed’’ regulatory agencies are unable to coor- primarily because the broader institutional, eco- dinate monitoring and enforcement efforts at a nomic, and legal-regulatory environments in these level needed to prevent the commission of frauds nations are in the initial stages of evolution as that cut across regulatory boundaries. The infor- compared with economies in which the governance mation gaps and significant lapses in regulatory context has evolved over many decades of experi- vigilance that preceded the Enron fiasco were ence with capitalism. repeated with even more dire consequences in In both India and China, regulatory bodies have the more recent sub-prime mortgage crisis and advocated comprehensive and rigorous reforms ensuing financial meltdowns that decimated intended to bolster the credibility and integrity of once-venerated and iconic Wall Street firms. listed companies, to facilitate access to capital One widely used government practice that has for new businesses and expansion of existing failed to achieve the desired objective is equity- businesses, to achieve more transparency and ac- based executive compensation. Agency theory sug- countability of corporate managers, and to enforce gests that ‘‘the most direct solution to [the] agency adherence to international standards of account- problem is to align the incentives of executives with ing and financial reporting. For instance, China’s the interests of shareholders by granting (or selling) Company Law, enacted in December 1993, was an stock and stock options to the CEO’’ (Hall & important starting point in the evolution of gover- Liebman, 1998, p. 656). At their peak in 2001, stock nance reforms; it was followed by the China Securi- options accounted for over 50% of the pay of CEOs of ties Law in December 1998 and, more recently, the major United States firms (Sanders & Hambrick, Code of Corporate Governance for Listed Companies 2007). However, stock options give executives a in China, enacted in January 2002. The latter, in strong incentive to take excessive risk because particular, was designed to further strengthen the the downside risk is zero, because the lowest value requirements related to accounting procedures and of stock options is zero, while the upside gain is information disclosure, selection of independent unlimited. Research has shown that options-loaded directors, and shareholder rights and protection. CEOs deliver more big losses than big gains (Sanders In India, the most significant milestone in the & Hambrick, 2007). Moreover, the use of options in evolution of corporate governance was the estab- executive compensation also gives executives an lishment of the Securities and Exchange Board of EXECUTIVE DIGEST 549

India (SEBI) in 1992, an event followed by a series of As a direct result of the Sanlu milk powder scandal, over-arching and comprehensive governance re- China passed its first food safety law–—effective forms implemented by the Indian government based June 1, 2009–—in an effort to restore consumer on the recommendations of four independent gov- confidence. Under the new law, consumers can ernance committees: the Bajaj Committee in 1996, get financial compensation of up to 10 times the the Birla Committee in 2000, the Chandra Commit- price of the product, in addition to compensation tee in 2002, and the Murthy Committee in 2003. For for any harm caused by tainted food. The law also more details on the recommendations from these bans food safety supervision agencies from adver- committees and the ensuing governance reforms, tising food products and states that individuals, see Rajagopalan and Zhang (2008). including celebrities, who advertise for a substan- Notwithstanding the scope and urgency of the dard product may also be held liable for damages. reforms enacted in both countries, however,there is While this new law represents an important step in widespread agreement that both countries are very the monitoring and strengthening of food safety weak when it comes to enforcing these reforms. standards, some are skeptical about its chance of Indeed, in a 2004 report on the implementation of success. The new law did not create a single, corporate governance codes in India, the World Bank powerful body–—akin to the U.S. Food and Drug noted serious gaps and lapses, particularly in rela- Administration (FDA)–—to handle food safety. tion to the role of nominee directors from financial China’s Departments of Health, Agriculture, Qual- institutions, stock-listing laws and regulations, in- ity Supervision, Industry, and Commerce Adminis- sider trading, and dividend and share-transfer trans- tration will all share the responsibilities of actions (World Bank, 2004). monitoring the country’s food supply. In addition, While appropriate in many ways, the response of China has 450,000 registered food production and the Indian government following the Satyam crisis processing enterprises, with the vast majority em- was still criticized as being too slow. For instance, ploying just 10 people or less. A United Nations while the disclosure of fraud was made on a Wednes- report last year noted that the challenge of over- day morning, the first resulting crucial decision–— seeing these small businesses is one of China’s which was to dismiss the entire board of directors–— biggest hurdles in ensuring food safety. was only made on Friday night. In a scathing critique of the Government’s response timing, published in India’s leading business journal, Dubey (2009) sar- 6. Deterring governance frauds: A castically notes: cost-benefit approach

So what if crucial time was lost in the intervening Because financial frauds, product tampering, and 70-odd hours when the company, its finances, its many other violations of governance laws can be accounts, and IT infrastructure remained in the viewed as corporate crimes, we draw on the broad- hands of people who were part of the manage- er, well-established economics of crime literature ment that committed the fraud. So what if the (e.g., Eide, Rubin, & Shepherd, 2006) to argue that Centre and the State debated for three days the likelihood of such violations is contingent upon about who would initiate legal action against two factors: (1) the costs associated with commit- the Rajus. So what if incriminating evidence may ting a fraud, and (2) the benefits derived from have been destroyed as Satyam investigators committing that fraud. The higher the costs imposed have discovered. . .they are unable to locate on the perpetrator and the lower the benefits asso- the company’s bank statements. (p. 64) ciated with the fraud, the lower the likelihood that the fraud will be committed. Dubey (2009) goes on to note: India must also build a consensus on separating 6.1. Deterring fraud by increasing the economic fraud investigators and offices such as costs the SIFO from political clutches such as the Ministry of Corporate Affairs. Business and poli- The costs associated with committing a governance tics are so well intertwined in the country that fraud generally depend upon three factors. The first political control can potentially influence in- is the probability that the deviant behavior will be vestigators. . . .All of this could be avoided if discovered, which substantially depends upon the business fraud or bankruptcy investigators were monitoring mechanisms in place. The greater given the statutory authority and the indepen- the probability that the fraud will be discovered, dence to swing into action without waiting for the less likely it is that a company or its management a political nod. (p. 65) will commit a fraud. 550 EXECUTIVE DIGEST

The second factor is the size or extent of the 6.2. Deterring fraud by reducing the punishment (e.g., financial fines, loss of liberty) if benefits a fraud is detected and, relatedly, who will be affected, monetarily or otherwise, by the punish- The benefits associated with a fraud depend upon the ment. Severe punishment–—for example, being utility function of the individual or group committing banned from an industry/functional area if the fraud. Of course, this utility function can also be certain violations are uncovered–—will discourage generated at more aggregate levels for a top man- a company and the management. In many cases, agement team or an entire corporation, depending however, because the company pays for the pun- upon growth and profitability targets, schemes for ishment, the threat of punishment may have lim- division of profits, and so on. The utility derived from ited effect in disciplining management behavior. fraudulent acts reflects both financial and non- For instance, in May 2002, Merrill Lynch paid a financial benefits (e.g., political power, prestige, $100 million fine to settle with the State of New social standing). In both developed and developing York after its analysts were caught denigrating economies, the benefits associated with corporate the companies they touted to investors during frauds can be substantial although, again, the mag- the technology bubble era. Indeed, the major nitude and nature of these benefits can vary across purpose of the SEC’s recent requirement for CEOs these environments. In developed nations, the and CFOs to personally certify their companies’ winner-take-all syndrome, the increasing disparity financial statements is to narrow the legal loop- between pay and performance, and the excessive hole between a company’s financial statements risk-taking witnessed in the recent collapse of large and its senior executives’ individual responsibili- financial institutions have resulted at least partly ties, thereby enhancing the quality of a company’s from the disproportionate benefits bestowed on a financial disclosures (Zhang & Wiersema, 2009). few at the uppermost echelons of the corporate Once they have certified their companies’ finan- sector. Whether CEOs and senior managers are paid cial statements, subsequent revisions of the state- for their performance or not is a topic of continued ments could potentially expose executives to debate in both academic and business circles. How- criminal charges. ever,the prevalence of huge financial payouts for top The third factor is the likelihood that the pun- executives and the low personal risk associated with ishment will be enforced, which depends upon the performance failures have clearly increased the pe- effectiveness and speed of the legal system in cuniary benefits associated with deviant corporate place. Especially in emerging markets such as behaviors. China and India, the major problem regarding In developing nations, the benefits appear to stem corporategovernanceisnottheabsenceoflaws from the spurt of economic opportunities created by but the lack of timely and consistent enforcement the opening of once-closed economies and the en- of the laws that already exist (Rajagopalan & couragement of private enterprise in industries once Zhang, 2008). dominated by the public sector. While the overall Because of the relative maturity and sophisti- opportunities for wealth creation have increased, the cation of governance laws, and the legal and distribution of such wealth continues to be lopsided. regulatory frameworks in developed economies Business press articles in recent years have docu- like the United States, the costs associated with mented the increasing number of millionaires and corporate frauds are quite significant; white-collar billionaires in both China and India, the rapid growth criminals can access the best legal representation, and profitability experienced by the largest business though, which can sometimes reduce the proba- houses and families, and the rapidly increasing sala- bility and size of the punishment. In comparison, ries and benefits at the top executive levels. The as noted earlier, monitoring and enforcement of winner-take-all syndrome that may have driven indi- governance laws is particularly lax in both India vidual and corporate excesses in developed nations is and China, albeit for somewhat different reasons, now permeating emerging economies as well, where and the breakdowns in implementation serve to the asymmetry in the distribution of rewards is fur- reduce the costs associated with committing these ther exacerbated by lax governance regimes and poor crimes, especially because the most powerful busi- enforcement mechanisms. ness people and corporate families are also very In summary, the recurrence of corporate frauds well connected with leading politicians, who can depends upon both the potential costs and benefits in turn often influence regulatory agencies. There- of committing the frauds. Developed nations have fore, the potential cost of committing a fraud is been able to deal with the cost side of governance relatively lower in developing countries than in failures relatively effectively, although recent cor- developed countries. porate excesses have renewed concerns about EXECUTIVE DIGEST 551 these aspects. Developed nations, though, are faced compensation abuses more effectively than one- equally with the twin challenges of increasing the size-fits-all reforms that unintentionally incentivize costs and decreasing the benefits associated with the exploitation of loopholes or, even more trou- corporate frauds and excesses. These differences bling, thwart innovation and entrepreneurship. have implications for the direction in which reforms need to be directed, especially because–—as we 6.4. Curbing corporate frauds in China argue later–—attempts in developing nations to curb and India: Costs vs. benefits the benefits may have the costly effect of curbing individual and corporate ambition and entre- In developing nations like China and India the gov- preneurship, with serious debilitating effects on ernance regime is characterized by relatively low overall growth and prosperity. costs of committing corporate frauds, due to lax monitoring and weak enforcement, as well as high 6.3. Governance challenge in the United benefits, due to rapid growth opportunities and States: Costs vs. benefits windfall economic gains for the winners. For practi- cal and policy reasons, however, it is difficult for While there is certainly room for bolstering the mon- these economies to simultaneously and aggressively itoring and enforcement sides of the governance tackle both challenges. Attempting to tackle the situation in the United States, especially in relation benefits side too aggressively–—by controlling/ to coordinating and sharing information across dif- regulating salary levels, hiring and promotion deci- ferent regulators, we believe that influencing the sions, investment decisions, and so forth–—can have payoffs associated with corporate and individual mis- the unintended and potentially disastrous effect of conduct should be more of a priority than tweaking curbing much-needed entrepreneurship, talent re- the regulatory code further. It is indeed gratifying to tention, and ambitious growth and profitability note that the new Obama administration is beginning targets. Given the nascent stage of economic to focus on this issue, especially in the context of development in countries like India and China, we executive compensation, given that compensation believe that it may be more prudent to concentrate and equity ownership are after all the most significant on the cost side, and focus on stricter implementa- benefits. Reforms being considered include, among tion and enforcement of monitoring and punishment other things, the following: (1) banks receiving fed- mechanisms, at least in the short- to mid-term. eral rescue money must agree to executive pay re- For instance, the Reports on the Observance of strictions and to a ban on big paychecks for departing Standards and Codes (ROSC) noted that many of the executives, known as golden parachutes; (2) advisory sanctions and enforcement rules currently in place voting on executive compensation; (3) restrictions on in India were inadequate, and that monetary sanc- deferred compensation; (4) a clearer definition of tions were particularly in need of adjustment (World performance-based pay; (5) limits on severance pay- Bank, 2008). While the sanctions imposed by the ments for senior executives; (6) broader ‘‘claw back’’ stock exchange included warnings, suspension of provisions to recoup bonuses; (7) higher levels of trading, and delisting, it did not include monetary engagement of the SEC in different aspects of corpo- fines that were high enough to deter noncompli- rate governance, especially in the compensation of ance. The ROSC also recommended better coordi- senior executives; and (8) greater transparency in nation of the roles and responsibilities of the three company disclosures, and enhanced personal ac- regulatory agencies charged with enforcing gover- countability of senior executives (‘‘Attacking,’’ nance norms over listed companies in order to 2009; Solomon & Paletta, 2009). minimize regulatory lapses and oversights. At the same time, changes to executive compen- Any benefits-side reforms that are considered sation systems have to be made very cautiously should be carefully assessed for their potential because past attempts–—such as the 1984 decision adverse effects on the managerial talent market, in the United States to cap severance payments at and on the corporate growth and wealth-creation three times base pay by imposing a special on strategies. Given that even developed nations have payments above that level and the $1 million cap only recently begun to worry about the benefits imposed on the tax deductibility of executive side of the equation, a ‘‘wait and learn’’ attitude salaries–—have often had unintended negative con- may be advisable for developing nations. We hasten sequences leading to even higher financial benefits to add that we are not arguing in favor of completely for top executives (‘‘Attacking,’’ 2009). Instead, eschewing benefits-side reforms in developing strengthening the ability of shareholders to monitor nation contexts. Indeed, governance reforms should pay deals ex-ante and making ‘‘say on pay’’ votes by aim to increase the costs and reduce the benefits shareholders mandatory at public firms may curb associated with corporate frauds for maximum 552 EXECUTIVE DIGEST deterrence. For example, China’s new food safety Corporate India’s governance crisis. (2009, February 2). Business law has increased consumers’ financial compensa- Week, 78—79. Did SEBI ignore Satyam under political pressure? The Economic tion for tainted food, from the price of the product Times. Retrieved from http://economictimes.indiatimes. up to 10 times the price of the product. While this com/articleshow/3969014.cms change certainly increases the costs for a firm to Dubey, R. (2009, January 26). Create a special force. Business commit the sort of fraud that Sanlu did, it may not World, 64—65. be a sufficient deterrent if the economic gains to be Eide, E., Rubin, P. H., & Shepherd, J. M. (2006). Economics of crime. Foundations and trends in microeconomics. Boston: reaped from fraudulent acts are potentially huge in World Scientific Publishing Co. relation to the costs. Indeed, to minimize the like- Hall, B. J., & Liebman, J. B. (1998). Are CEOs really paid like lihood of corporate frauds and related crimes, it is bureaucrats? Quarterly Journal of Economics, 113(3), imperative not only to increase the costs associated 653—691. with the crime (ex-post punishment), but also to Heron, R. A., & Lie, E. (2009). What fraction of stock option grants to top executives have been backdated or manipulated? reduce the benefits derived by the person or group Management Science, 55(4), 513—525. considering such acts (ex-ante utility). India’s Enron. (2009, January 8). The Economist. 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