A company’s corporate governance exists in order to prioritize and support the shareholders’ interests in accordance with laws and expectations of the stakeholders through oversight, monitoring, and controlling the company’s activities and personnel (Brooks, Pg. 218). Many companies used to hold and continue to hold flaws in their governance structures that allow management to operate their businesses to further their own personal self-interests instead of increasing the shareholders’ values. The three cases that I believe illustrates the most ineffective corporate governance system include: Nortel, Adelphia, and Tyco.
Nortel Networks’ ineffective corporate governance system stemmed off of the management’s use of earnings management in order to achieve internal targets. Nortel stated that they intended to restate about $900 million of liabilities carried on its previously reported balance sheet in order to reduce previously reported net losses and increase previously reported shareholders’ equity and net assets. However, it was found that the former corporate management and finance management allowed accounting practices that were not compliant with the United States GAAP in at least four quarters so that internally imposed pro-forma earnings before targets could be met. With these met targets and application of earnings management, all Nortel employees and senior management received significant bonuses. The rewarding of employees with bonuses under bonus plans tied to profitability allows the greed of managers to overtake their integrity and responsibility of increasing shareholders’ value. By applying earnings management and manipulating data, the company’s true financial position is not identifiable and the public does not receive accurate information. The leases of provisions that were not in compliance with U.S. GAAP allowed the company to display a consolidated pro forma profit in the first quarter when in actuality, the company’s operations...
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