| Parmalat, BCCI and Maxwell are examples of | | | | always the norm at Annual General Meetings. But |
| major corporate failures that shocked the world | | | | half a loaf is better than none, it is said. Not all the |
| prior to the inception of corporate governance in | | | | mistakes and loopholes could be plugged overnight |
| the 1980s. However, since the corporate scandal | | | | but communications should as usual be a two-way |
| of Enron, corporate governance has brought | | | | affair, continuous and all concerns by stakeholders |
| about increased attention amongst regulators and | | | | should be followed and investigated by |
| all stakeholders world over particularly | | | | independent bodies. |
| shareholders, banks and governments. This | | | | Enron and its executives have contributed large |
| concern has resulted in a focus on the relationship | | | | sums of money to some politicians. Enron created |
| between a company's shareholders and its Board | | | | a culture in which financial instruments was |
| of directors, as well as the executive and | | | | designed to turn profits into losses and taxes into |
| non-executive directors. | | | | tax shelters. Excessive risk was the word. It was |
| Regarded as leadership in the corporate sense, | | | | different with Next. It conducts a weekly "Next |
| corporate governance is meant to assist | | | | Brand trading meeting" which considers the |
| companies to manage and control risk processes | | | | performance and development of the Next Brand |
| within an organisation. | | | | through its different distribution channels. All |
| Inferred from its definition, corporate governance | | | | business aspects of risk management in respect |
| need to be more pragmatic in its operations | | | | of the Next Brand including sales, property, |
| ensuring that the company conforms to the laws | | | | product, systems, warehousing and personnel also |
| and regulations. | | | | considered here. Key performance indicators are |
| The corporate governance structure specifies the | | | | monitored daily and weekly to help to keep in |
| distribution of rights and responsibilities among | | | | check all aspects of risk. To Next, risk |
| different participants in the corporation, such as, | | | | management was part of their organisational |
| the board, managers, shareholders and other | | | | culture.Next's Board is responsible for the Group's |
| stakeholders, and spells out the rules and | | | | risk management process. It has delegated |
| procedures for making decisions on corporate | | | | responsibility for implementation of the risk |
| affairs. This is usually not the norm. Enron's | | | | management process to the Chief Executive and |
| demise as a result of its excessive risks, conflict | | | | senior management best qualified in each area of |
| of interest and poor accountability on the part of | | | | the business. The Board sets guidance on the |
| its directors, does not seem to have scared other | | | | general level of risk. |
| organisations. Recent events in organisations are | | | | Next's conduct or operations in the board room |
| not anything to write home about. Corporate | | | | should be emulated. Corporate governance should |
| governance is meant to govern not to be used | | | | be a continuous process and all |
| as a witch-hunting exercise. However, the way | | | | stakeholders-focused. It should not discriminate |
| things happen in the board room, corporate | | | | and should be regularly reviewed by an external |
| governance needs to be tightened if it can bring | | | | body appointed by shareholders in consultation |
| about the change so much needed at this time. | | | | with the board so that they do not take over the |
| By the directors confirming that the company | | | | responsibilities of the board. |
| accounts comply with requirements in the | | | | The Next's Board takes care not to disseminate |
| Company Act, they become accountable to the | | | | information of a share price sensitive nature which |
| entire stakeholders and responsible for | | | | is not available to the market as a whole. On the |
| safeguarding their assets and other of the Group | | | | other hand share performance-related pay |
| and hence for taking reasonable steps for the | | | | contributed to Enron's demise by pushing the |
| prevention of fraud and other irregularities. Enron's | | | | executives to announce non-existent profits |
| conduct indicated that its directors were not really | | | | through the special purpose entities to deceive |
| complying. To date, there is increasing acceptance | | | | the market in order to keep its stock price high |
| that in spite of legal duties remaining solely to | | | | to enable them receive their fat pay. They paid |
| shareholders, there is the view for companies to | | | | themselves huge salaries as a result. |
| be more accountable to other stakeholders | | | | This practice is still continuing all over the globe; |
| including workers. Even though this view is being | | | | and was mainly part of the current recession. |
| challenged both in America and the U.K, | | | | There is no doubt that Boards of companies |
| shareholders still want to wield more powers to | | | | should be made to live up to their responsibilities. |
| maintain their investment. This is evident in the | | | | With Next's corporate governance, one could see |
| recent demonstrations by shareholders describing | | | | that the main responsibilities lie with the Board. For |
| directors as 'fat cows'. | | | | example, the system of internal control and |
| Considering the relevant principles missed by | | | | major policy decisions as well as the Group's risk |
| Enron in its operations in comparison with Next, it | | | | management are the responsibilities of the board; |
| is gainsaying the fact that some of the mistakes | | | | who in turn delegates these responsibilities to the |
| Enron made are still going on in some | | | | CEO and senior management best qualified in each |
| organisations around the globe-unnecessary | | | | area of the business. |
| risk-taking; performance-related pay schemes | | | | The Board at Next acknowledged that its primary |
| including share options to Executives with the | | | | role is to represent and promote the interests of |
| non-executive directors sitting aloof doing nothing. | | | | shareholders; is accountable to shareholders for |
| Enron's Board's compensation committee refused | | | | the performance and activities of the Group and |
| to ask any question about the award of salaries, | | | | communicates with its shareholders in respect of |
| perks, annuities, life insurance and rewards to the | | | | the Group's business activities through its annual |
| executive members at a critical point in the life of | | | | Report and accounts, yearly and half yearly |
| Enron. Sir Goodwin's recent pension saga is a | | | | announcements and regular trading updates to the |
| recent case in point. It leaves a sour taste in the | | | | stock exchange. Enron's board of directors were |
| mouth of all stakeholders to see that 'simple' | | | | 'busy' trying to mislead tax authorities in order to |
| things to be done to salvage 'huge' losses or | | | | collect $87m from creating tax shelters. A little |
| scandals are clearly overlooked may be due to | | | | over the top maybe, but little drops of water |
| familiarity which breeds contempt, anyway. | | | | make a mighty ocean. Enron could have avoided |
| The temptation to be 'bought' with money is so | | | | all those mess if it had listened, complied and |
| strong that the idea of independent executive | | | | enforced the rules to the letter instead of bending |
| directors serving on a board is not having the | | | | them to suit their whims And caprices. The |
| impact it was expected to have as they all easily | | | | Business Roundtable emphasised that in planning |
| get caught up in the scandal in the long run. All the | | | | communications with shareholders and investors, |
| so-called independent committees, directors, and | | | | companies should consider never misleading or |
| auditors were there to bring checks and balances | | | | misinforming shareholders about the corporation's |
| yet they failed shareholders. | | | | operations or financial condition. This was lack of |
| People were just doing anything they want. | | | | business ethics. |
| Suffice to say that the onus of the matter is that | | | | Enron appears to be 'an accident waiting to |
| the culture of the organisation should be linked | | | | happen'. Enron's internal controls had been very |
| with individual values and channelled to what the | | | | weak as a matter of fact. When an employee |
| organisation is expected to do in its corporate | | | | wrote a memo about the CEO, Ken Lay; he |
| rules and regulations. This could in no doubt go a | | | | himself handled the matter internally by appointing |
| long way to stamp out the bad nuts from the | | | | a law firm which has a long association with Enron |
| corporate board rooms. | | | | to investigate the matter. Auditors, lawyers and |
| Enron created partnerships with shell companies | | | | independent directors should be seen to be totally |
| or subsidiaries known as special purpose entities | | | | independent as outlined in the relevant regulations |
| (SPEs), enabling them to keep hundreds of millions | | | | and laws. They should not be allowed to dabble in |
| of dollars in debt off its books, overstate and | | | | the company's affairs where they have any |
| understate debt due to some very loose | | | | interest. This must be seen to be enforced. |
| accounting rules. The Directors of Next plc on the | | | | The main lesson to learn from Enron's experience |
| other hand complied with Company law requiring | | | | is there was no compliance whatsoever with |
| them to prepare accounts for each financial year | | | | Enron's operations. Enforcement does not |
| which give a true and fair view of the state of | | | | necessarily mean there would be compliance. |
| affairs of the company and the Group and of the | | | | Enforcement precedes compliance and could be |
| profit or loss of the Group for that period. Who | | | | linked together to the success of corporate |
| controls the monitor? A lot might have been said | | | | governance. Enforcement means to compel |
| and written about this but it is worth commenting | | | | people to comply with or do something by law or |
| that auditors who are meant to control the | | | | regulation. Unfortunately this had not been the |
| system (and for that matter the controllers) are | | | | case in most of the corporate scandal cases. No |
| human beings. They have conscience and thus | | | | one seemed to enforce the laws and regulations; |
| someone or somebody could be said to also | | | | not the independent directors or the regulators |
| monitor them and the cycle goes on and on. | | | | themselves. The significance of this is that |
| What is actually needed in my opinion is little | | | | compliance to laws and regulations does not come |
| honesty, morals and fear of God. | | | | easily without independent directors disciplining |
| The four-member Next's audit committee | | | | themselves to follow the regular review of risk |
| reviews the risk management process and | | | | management issues for the company concerned. |
| significant risk issues are referred to the Board | | | | Nevertheless, corporate governance could be the |
| for consideration; and considers financial reporting | | | | hub to the reputation of company and its |
| and reviews the Group's accounting policies | | | | directors regardless of other equally important |
| relating thereto. | | | | issues like corporate social responsibility (CSR) for |
| It must be said here that in particular, major | | | | the reason that it has widely been embraced for |
| accounting issues of a subjective nature are | | | | its apparent economic health of companies and |
| discussed by the committee thus zeroing in to the | | | | society in general. Like Total Quality Management, |
| issues relevant to Next not just the IASB's | | | | corporate governance should be made |
| requirement. This procedure might have helped | | | | company-wide, stakeholder-focused and rated |
| the position of Next in the long run and could | | | | given awards like the ISOs.The ratings should be |
| definitely help other companies if they follow | | | | published regularly. This could benefit all stake |
| those principles. | | | | holders and bring back the trust shareholders in |
| Furthermore, the first basic rule of investing which | | | | particular have lost in both executive and |
| was diversification was also breached at Enron. | | | | non-executive independent directors. |
| Workers investing pension money in company | | | | Reference: |
| shares had their savings tied up in Enron's stock; | | | | 1.'In search of Gates'; Fortune, October 4, 2004 |
| and there was no plan for workers to diversify | | | | pp76 |
| those savings and government regulators did | | | | 2. Elkind, P; Bethany, M; 'They're getting close', |
| virtually nothing. This is irresponsibility on the part | | | | Fortune November 24, 2003 page21 |
| of the directors. Workers' anger was evident | | | | 3. Fortune Europe Edition No.24, December |
| when in France, for example some company | | | | 22,2003pp 40 |
| bosses were held hostage. The G20 | | | | 4. Gunther, M; 'Boards Beware!' Fortune |
| demonstrations in London were also other cases | | | | November 10, 2003 page 80 |
| in point. | | | | 5.'Inside The Head of BP' by Nelson D.Schwartz, |
| In Next people are considered a key asset to the | | | | Fortune, July 2004, page 56 |
| business. The Board has, therefore, adopted | | | | 6.'LEADERS: The real Scandal' the Economist |
| policies aimed at minimising risks in the Group's | | | | January 19th, 2002 page9 |
| activities to ensure that they do not harm | | | | 7. Next Annual Report and accounts, January, |
| employees, customers or the general public, all of | | | | 2002 |
| whose interests are regarded as critical to | | | | 8. Sellers, P. "INNOVATION SPECIAL; P&G: |
| business success. Shareholders have an | | | | Teaching an old dog New Tricks", Fortune; May |
| opportunity to ask questions or represent their | | | | 31, 2004 page36, 37, 60-63 |
| views at the Annual General Meeting. This is | | | | 9. Taylor III, A. |