Question

Why has the role of corporate governance increased in the past two decades?

Answer 1

Corporate Governance refers to the processes and activities in which operations of the organisation are conducted. Corporate Governance in the recent times has gained significance in the wake of scandals such as Enron.

Corporate Governance in the past two decades has gained much more relevance as the companies are progressing well, the way the company operates needs to be dynamic. However, not much reliance on conduct of organisation was there previously. The norms related to internal control, related party transactions, disclosure requirements merely exists on paper only. There was lack of strict implementation of rules and regulations made to check these norms.

Lack of effective implementation lead to fabrication of books of accounts, window dressing of financial statements rampant across the companies. One such scandal came to limelight was Enron, which was an accounting scandal, the company was fabricating their financial statements using rosy valuations while the assets were bleak.

However, in the wake of Enron scandal, Sarbanes Oxley Act was implemented which provides very stricter rules to the corporate. Following are some of the measures taken under the Act:

• The composition of independent director in board of directors.
• Audit committee
• Remuneration committee.
• Related party transactions
• Other significant disclosure requirements that might affect the financial statements
• Whistle blower policy
• High penalty on failure to follow provisions of the Act

Over the next two decades, these regulations under the Act proved to be deterrant to the potential offenders.