Corporate Governance, Management of Earnings, and Transparency in Disclosure by Karim S. Rebeiz, Ph.D. American University of Beirut for Second Middle East and North African Forum on Corporate Governance

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Corporate Governance, Management of Earnings,
and Transparency in DisclosurebyKarim S.
Rebeiz, Ph.D.American University of
BeirutforSecond Middle East and North African
Forum on Corporate Governance
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Management of Earnings

• Aggressive
• Disingenuous
• Fraudulent

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Why Management of Earnings

• Executive Compensation
• Taxes

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Cases of Management of Earnings

• Enron
• WorldCom
• Vivendi
• Parmalat

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Key Constituents

• Accounting profession
• Auditing profession
• Organized exchanges
• Government agencies
• Board of directors
• Internal auditors
• Shareholders activists (institutional investors)

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Accounting Standards

• Improvements in technologies and infrastructures
  are making it easy to engage in global financial
  transactions.
• The standards used all over the world reflect the
  difference in cultures between one country and
  the next. In Germany and the Netherlands, for
  example, there is a high emphasis on providing
  financial information to the long-term
  stakeholders whereas the central position in the
  U.S. and the U.K. is on providing information to
  short-term investors.

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FASB versus IASB

• There are major philosophical differences that
  exist between FASB (rules-based approach) and the
  IASB (principle-based approach) standards in
  terms style, structure and processes.
• Example FASB does not require ESO to be
  expensed, whereas IASB does require it.

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Rules-Based vs. Principles-Based

• U.S. GAAP
• complex and detailed rules with limited
  room for judgment and flexibility, and
• failure to comply with the letter of the law
  implies violation of FASB regulations.

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Rules-Based vs. Principles-Based

• IFRS
• broader concepts and principles with less
  specific guidance and significant degree of
  reporting discretion,
• failure to comply with the spirit or
  intent of the standard implies violation of
  IFRS,
• significant emphasis on the concept of
  substance over form

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Trends in Accounting Standards

• Method 1 Adopt a single accounting standard,
  which would require the cooperation of various
  authoritative legislative, listing and
  governmental bodies across the globe.
• Method 2 Allow a competition to take place
  between the two main authoritative bodies of
  accounting standards, namely FASB and IASB.

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What is Corporate Governance

• Internal structure that are put in place to
  oversee management.
• The board of directors is the steward of
  corporate governance.

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Why is Corporate Governance Important?

• Accountability
• Legitimacy
• Expertise

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Role of the Board of Directors

• Oversight role on management
• Monitoring
• Controlling
• Advising
• Management is accountable to the board the board
  is answerable to the shareholders
• The role of the board is NOT to manage the
  day-to-day activities of the firm.

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Lebanese Companies Peculiarities

• Family owned enterprises
• No dilution of ownership
• No institutional investors
• No shareholders activism
• The controlling and monitoring role of the board
  is subordinate to its advising and consensus
  building role

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Cultural Differences in BOD

• Philosophical Differences
• Anglo Saxon versus Continental Europe versus
  Business Network in Japan
• Structural Differences
• Unitary versus two-tier board system
• Joint versus separate leadership structure

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Basis for Unitary Board

• Conflict of interests between management and
  shareholders.
• Concept of directors and leadership independence
  is important.
• It all started with the atomization of share
  ownership and the divorce between financing and
  management.

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Independence in BOD

• Structural independence (directors, committees
  and leadership)
• Committees independence (audit, compensation and
  nominating committees)
• Outside consultants independence (e.g., external
  auditors)
• Internal auditors

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Codes of Best Practice

• Cadbury Committee Report
• Organization for Economic Cooperation and
  Development (OECD)
• Vienot Report
• The Brazilian Institute of Corporate Governance
  Code
• The Confederation of Indian Industry Code (my
  favorite)

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Failure of Corporate Governance

• Regulations have not always been effective
• The Enrons case (an exemplary board that failed
  miserably).
• Regulations have been reactive as opposed to
  proactive
• Examples The Sarbanes Oxley Act.
• It all starts within the firm itself

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Conclusions

• Remove incentives for management of earnings
• Recognize that there are many dimensions for
  independence
• Increase communication and transparency between
  shareholders and the board members

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Final Thought 1

• Who would be the authoritative voice for
  worldwide compliances and oversights, and how to
  provide oversight of audit professionals on a
  world-wide basis to ensure consistency in
  reporting and ethical behavior across
  multinational firms?

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Final Thought 2

• Directors should have integrity and independence
  of thought the courage to express their
  independent thought a grasp of the realities of
  business operations an understanding of the
  changes taking place regionally, nationally and
  internationally and an understanding of business
  and financial language (Confederation of Indian
  Industry Code Recommendation)
• The 3 Cs attributes for effective directors