In twentieth century 80years, in order to guarantee equity and transparence of board operations, reconstructing investor assurance. UK introduced the non-executive manager system. The intent of non-executive managers system is to cut down the bureau costs, overcome the failing of internal control, prevent the maltreatment of insider control rights. Besides this system can protect the legitimate rights and involvements of all stockholders, keeping the company ‘s involvements and beef uping the supervising of the company ‘s direction. However, the eruption of Enron, WorldCom and several large company ‘s fiscal dirts shook the universe ‘s finance and society. These dirts make people began to doubt the system of corporate administration, particularly the efficaciousness of non-executive managers.
Based on such state of affairs, this essay aims to through analyzing several instances: Enron, WorldCom and The Equitable to look into the strengths and failing of sensed administration. Then it may exemplify what ‘s the function of non-executive in good corporate administration and give some suggestion.
Cases analysis
Enron
In December 2001, the largest U.S. energy bargainer, the market value up to 60 billion U.S. dollars-Enron went insolvent. His dramatic bankruptcy exposed that the independent manager system of Unite State is non perfect ( Brickey,2003 ) . As the most U.S. companies, Enron ‘s board was consisted of five sub-committees. On the surface, all of those commission operated really efficaciously and moderately, the overall corporate administration construction seemed so “ flawlessness ” . However, the truth is the “ independency ” of managers was non as the Enron disclosed before. There was a figure of independent managers had involvement relationship with Enron, these delicate ties of cooperation impacted their place as an outside managers. For case, the audit commission should measure and supervise the company ‘s internal controls, accounting independency and accounting criterions. But when the Enron hired Arthur Andersen as external audit and adviser, they besides created a series of partnerships with Andersen ‘s CFO and carried out a big figure of complex minutess and manipulated net incomes to cover up immense debts. This action seemingly damage the company ‘s internal control system. Incredibly, the audit commission has non questioned it, the individualistic attitude on the issue was so obvious ( Palepu and Healy,2003 ) . The other illustration is Enron ‘s 17 board members, except the president and main executive officer, the staying 15 managers are all independent managers. But there were about 10 people signed a confer withing contract with the company and have a common nexus with charitable organisations. The board of Enron was clearly like a nine which has strong internal links.
All these groundss indicate that the independent managers are non competent at work, they did non seriously carry out the duty on behalf of public stockholders and at a certain degree acquiesced the fraud of Enron ‘s high-ranking executive. The independent managers have been seen as an of import function who is standing at an nonsubjective and impartial place, protecting the involvements of the company. It is widely expected that they can direct a signal when the company has operation hazard, besides can use warning to company ‘s non-compliance and misconduct action. The bankruptcy of Enron exposed an of import issue that the managers were deficiency of independency, the independent managers is non independent ( Black et al,2003 ) . And there exist the insufficiencies and failing of independent managers system, this system necessitate to be reformed and improved. How to specify the independency of non-executive and how to keep such independency become a large job.
WorldCom
If the Enron dirt is merely the beginning, the WorldCom was no uncertainty the biggest fiscal dirts in the U.S history. In order to confront the ferocious competition in the telecommunications market, endeavoring to turn capital strength to maintain the technological publicity and implementing the outreach enlargement scheme, the WorldCom adopted deceitful accounting method to run into Wall Street net incomes appraisal ( Sidak,2003 ) . WorldCom ‘s board contained three specialised commission: audit commission, wage commission and nomination commission. However, the audit commission was fundamentally merely an empty rubric. There was none of the members had the specialized background of accounting and auditing, all of the members were formed by non-professionals individuals. The monitoring effectivity by such audit commission is can be imaged.
Furthermore, the internal control besides existed job. The internal auditing does non straight response to scrutinize commission, but straight accepted the CFO ‘s leading. Such behaviour was deficiency of the minimal independency and increased the hard of WorldCom Internal Audit Department to implement the accounting supervising, while deprived the power of the internal audit on the fiscal audit. The internal audit is chiefly engaged in operating public presentation audit and audit of budget execution, but the internal fiscal audit maps was outsourced to the Andersen. The fiscal accounting auditing and supervising has been weakened from dual scrutinizing and supervising to a individual 1. Because of the defect of WorldCom administration mechanisms, the fraud confederacy was frequently win.
The Equitable
If the above instances were about the delinquency of responsibility of non-executive managers, so in 21st century, the most influential instance in UK is the Equitable, this instance indicates the more rigorous duty criterions. In 2003, The Equitable life confidence society v. Roger Bowley and other 14 Directors was no uncertainty dropped a heavy bomb to the UK non-executive manager who was confronting the judicial proceeding. As the non-executive managers of insurance companies, they trust the company ‘s statistician was ruthlessly hit by the Court and presumed to be unreasonable. The Court judged the non-executive managers violated the responsibility of attention. However, the non-executive managers believed that their attack is right from start to complete and in such fortunes any of the rational non-executive managers would make the same thing as them. They argued that they are entitled to trust on the articles of incorporation and actuary, while the latter function to do recommendations on the issues about warrants and dividend, besides pulling them attending to the related jobs. They debated that the statisticians dispel their concerns and assured them that if selected DTBP algorithm, there was no jobs about the contract, and will non impact the outlooks of insured. However, evidently the justice did non accept this account, he stated that the non-executive managers have duty to carry on an independent opinion and supervise the direction, they besides should make more to guarantee that the undertaking is legitimate and will non do the insured ‘s fright.
In this instance the responsibility of non-executive manager has been promoted to a really rigorous degree, the non-executive managers can non merely trust on executive managers and senior functionaries to transport out their ain responsibilities. They must keep their function as a proctor and exercising independent opinion on company ‘s behaviour. Apparently, this instance seems a spot overkill, in this instance if the non-executive managers trust statistician is non sensible, so what the bound of sensible trust?
The non-executive managers
Based on above three instances, we will from three facets to analyze how the non-executive managers play their function in “ good ” corporate administration.
The independency of non-executive managers
We can see that there exist a common point in above two instances, they all emphasize the necessity of independency by non-executive managers. The independency means that the non-executive managers have to be independent with the company ‘s direction when they doing determination and must consistent with the involvement of house ‘s stockholders. The independency of non-executive managers makes them plays an of import function in corporate administration construction and play a particular function in supervising corporate direction, commanding and equilibrating the right of stockholders and directors, besides can protect the stockholder ‘s rights and involvements ( Enrione et al. , 2006 ) . Compared to the executive managers, the non-executive managers may stand more nonsubjective and just place. For illustration, they can offer the added value proposals and suggestion by utilizing their experience and cognition when the company doing scheme, besides they will advance the company to follow the good corporate administration codification.
However, in most instances, the non-executive managers can non accomplish the existent independency. Due to the interaction between non-executive managers and direction, it may do several issues for the operation of company ( Daily et al. , 2003 ) . We can see this job signifier Enron and WorldCom ‘s instances. The non-executive managers may be hard to pull out of control by direction, which makes them non merely loss the regulative maps, but besides allow the external investors cut down the necessary review of companies by swearing the non-executive managers ‘ repute and experience. Finally, doing the direction fraud easy to win.
Therefore, the independency should chiefly reflect in two facets. First, the non-executive managers should be independent of major stockholders, viz. , they should go the guardian of the little stockholders. The 2nd is they should be independent of operators, that is they should be the guardian of the involvements of all stockholders. To keep the independency, they company should build a sensible vote regulations, to guarantee that the election of non-executive managers are genuinely non affected by major stockholders and existent accountants. But on the other manus, the “ one hundred per centum independent ” besides has defects, the direction should ne’er be wholly herding outside the board, if the managers and the company can non link in a appropriate degree, the investors will besides experience concern. So the most important point is to happen a balance point between them.
The responsibility of attention
Beside the independency, the responsibility of non-executive managers besides become another argument point. When the non-executive managers enjoy the rights, at the same clip they should besides hold a corresponding responsibility. Rights and responsibilities are complementary symbion ( Wade,2002 ) . The responsibility of attention is the basic factor for non-executive managers. There are two significances for responsibility of attention: First, as the non-executive managers of listed companies, their clip and energy may be limited and may easy to pretermit their responsibilities, so they should be assigned to the responsibility of attention which can advance them due diligence services for companies. Second, the responsibility of attention besides requires the non-executive managers must hold the suited ability and cognition to supply protection for their function ( Rousseau,2005 ) . However, in fact, there exist a hard and doubt on opinion of whether the responsibility of attention is plenty or non. For case, in the Equitable instance, the justice adopted the more rigorous criterion on responsibility of attention and this cause the contention of instability between non-executive manager ‘s wages and responsibility. By contrast, the excessively loose responsibility of attention will besides take to the delinquency of responsibility, such as Enron and WorldCom instances.
The non-executive managers are non the company ‘s ornament, but the substantial elements of corporate administration. A manager who accepted the place whether the executive or non-executive managers have the duty to understand the character of their duty ( Atkins,2004 ) . But it must be stressed that the extent of responsibility of attention depends on the peculiar company ‘s regulations mode and range of operations, every bit good as the accomplishments and expertness of single managers. In other word, a qualified non-executive managers should hold professional making, experience and cognition. And merely at a non-executive manager does his best attempts that can be considered to carry through the responsibility of attention.
4.Conclusion
The non-executive manager is built-in constituent of the board, the debut of non-executive manager system is trusting that it can cut down the mistakes through the company ‘s decision-making procedure and forestalling the single major stockholders encroach the community and little stockholders ‘ involvements. The general status of corporate administration in Europe, U.S. and other states are instead good, we can non because some failure instances to contradict the whole. Because the non-executive managers have the particular map which can non be replaced by other monitoring mechanisms. But the system of non-executive demand to reform, better and beef up. The non-executive manager is non merely an award, more of a duty.
