how to assess corporate governance
as an investor you want to select companies that practice good corporate governance in the hope that you can thereby avoid losses and other negative consequences such as bankruptcy you can research certain areas of a company to determine whether or not it s practicing good corporate governance these areas include types of bad governance practices include examples of corporate governance bad and goodbad corporate governance can cast doubt on a company s reliability integrity or obligation to shareholders all can have implications for the financial health of the business tolerance or support of illegal activities can create scandals like the one that rocked volkswagen ag starting in september 2015 the details of dieselgate as the affair came to be known revealed that for years the automaker had deliberately and systematically rigged engine emission equipment in its cars to manipulate pollution test results in the u s and europe volkswagen saw its stock shed nearly half its value in the days following the start of the scandal its global sales in the first full month following the news fell 4 5 2vw s board structure facilitated the emissions rigging and was a reason it wasn t caught earlier in contrast to a one tier board system common to most u s companies vw had a two tier board system consisting of a management board and a supervisory board in keeping with the continental model of corporate governance the supervisory board was meant to monitor management and approve corporate decisions however it lacked the independence and authority to carry out these roles appropriately the supervisory board included a large portion of shareholders ninety percent of shareholder voting rights were controlled by members of the board there was no real independent supervisor as a result shareholders were in control and negated the purpose of the supervisory board which was to oversee management and employees and how they operated this allowed the rigged emissions to occur public and government concern about corporate governance tends to wax and wane often however highly publicized revelations of corporate malfeasance revive interest in the subject for example corporate governance became a pressing issue in the united states at the turn of the 21st century after fraudulent practices bankrupted high profile companies such as enron and worldcom the problem with enron was that its board of directors waived many rules related to conflicts of interest by allowing the chief financial officer cfo andrew fastow to create independent private partnerships to do business with enron these private partnerships were used to hide enron s debts and liabilities if they d been accounted for properly they would have reduced the company s profits significantly 3enron s lack of corporate governance allowed the creation of the entities that hid the losses the company also employed dishonest people from fastow down to its traders who made illegal moves in the markets the enron scandal and others in the same period resulted in the 2002 passage of the sarbanes oxley act it imposed more stringent recordkeeping requirements on companies and stiff criminal penalties for violating them and other securities laws the aim was to restore confidence in public companies and how they operate it s common to hear examples of bad corporate governance in fact it s often why companies end up in the news you rarely hear about companies with good corporate governance because their corporate guiding policies keep them out of trouble one company that seems to have consistently practiced good corporate governance and adapts or updates it often is pepsico in drafting its 2020 proxy statement pepsico sought input from investors in six areas the company included in its proxy statement a graphic of its current leadership structure it showed a combined chair and ceo along with an independent presiding director and a link between the company s winning with purpose vision and changes to the executive compensation program 4