Fraudulent behaviour in corporations is much more common than you might think. Indeed, the stories covered in the media are just the tip of the iceberg. The author, a Chair in Finance at the University of Toronto, shares findings from his research, which found that two out of three instances of fraud likely goes undetected. His analysis of the demise of Arthur Anderson indicates that prior to the 2002 implementation of Sarbanes Oxley (SOX), 41per cent of large public firms were misreporting their financial accounts in a material way and 10 per cent were committing securities fraud, imposing an annual cost of $254 billion on investors. He concludes that, if SOX reduced the likelihood of undertaking fraud by even 10 per cent, its high cost - estimated at $3.8 million per firm, on average - would be fully justified.
William Browder, the top executive of the Hermitage Fund, the best-performing international equity fund over the last five years, attributed much of his funds' strong returns to its focus on shareholder activism and corporate governance. In 2001, he was putting this approach to the test by accusing the Russian oil and gas giant Gazprom and the international accounting firm Price Waterhouse Coopers of not stemming governance problems. Although the press provided extensive coverage of Gazprom's problems and the share price rose, Browder failed in his other efforts to get a board seat, and his lawsuits were dismissed. Was it time to refine or change this activist strategy? These were the questions Browder (and his investors) considered as he left on a long overdue vacation.
In April 2001, Dietmar Kuhnt, CEO of the German energy giant RWE, had to make a decision that would affect his company's future. Profits in the electricity sector depended heavily on regulatory rules that influenced industry structure and pricing. RWE had emerged through deregulation as one of the largest electricity companies in Germany and a multiutility. Now there was a proposal on the table to replace the largely lighthanded regulatory model based on negotiation between private parties with a more traditional regulatory model of an industry-specific regulator. What type of regulatory regime would be best suited to RWE's ambitious strategy to grow and prosper?
For many firms, government interaction is expansive, influencing the conduct of firms and industry structure. The visible hand of government, in the form of a regulatory scheme, plays a role in firm affairs along with the invisible hand of market forces. Deregulation and regulatory reform have changed but not eliminated government intervention. In such regulated environments, successful business strategy requires an understanding of the goals of regulatory involvement and the specifics of regulatory institutions. This note identifies some of the functions provided by regulatory institutions as well as the more important dimensions that differentiate specific institutional approaches to regulation. Understanding the common functions is important for managers interested in which approaches provide scope for long-term private sector involvement. Understanding the institutional differences is essential to devising specific strategies for business success. This note examines different regulatory decisions: the objectives behind regulatory intervention; the economic and legal basis of regulation; and various ways to implement a regulatory system, involving design choices in regulatory independence, the decision-making process, and industry scope.
Discusses the largest electric distribution company in Chile and one of the five largest private Chilean companies. Introduces the exercise of operating control in order to improve the profitability of the investments, privatization, and international expansions.
Can deregulation and the unleashing of competitive forces be combined with continued social obligations such as a duty to serve? This note uses the experience of U.S. telecommunications to illustrate the existence and influence of social obligations. Recognizing these obligations enhances understanding of the dynamics of deregulation. Finishes with a discussion of recent issues in telecom deregulation and how social obligations continue to play a part in determining regulatory responses. Focuses exclusively on telecommunications, although the same points--that social obligations exist in regulated industries and that finding a way to continue to address these obligations in a more competitive environment is a major element of regulatory reforms--apply to many other regulated industries.
Was the public or the private sector best positioned to provide security and baggage screening services? The suicide attacks on the World Trade Center and the Pentagon, and the plane crash outside Pittsburgh, marked September 11, 2001, as the date of the most severe terrorist attack and the most dreadful aviation incident in U.S. history, and initiated a search for steps to prevent such a calamity in the future. The U.S. House and the U.S. Senate passed two competing bills to address aviation security. The principal difference between the bills was whether the screening function could continue to be provided by the private sector or would be federalized--in effect, a reverse privatization of the service. Members of Congress had to consider questions of links between ownership, cost, and quality, and, most importantly, support one of the two bills. Can be used to introduce issues of market and government failure and to develop a contracting framework where key issues are the availability of information, the ability to provide incentives, the importance of incentives and innovation, and the importance of attributes that can't be contracted (such as some dimensions of product quality).
In March 2000, plans for the initial public offering of shares in PetroChina were proceeding on schedule, and institutional investors were evaluating the deal. PetroChina was China's largest oil and gas company and an attractive play on China's continued economic growth. The imminent listing on the Hong Kong and New York stock exchanges was designed to raise revenue and produce discipline for the firm. Disclosure policies and a new management compensation system with management rewards based on stock prices suggested a focus on investor interests. At the same time, the AFL-CIO drew attention both to corporate governance concerns with PetroChina and to human and labor rights issues linked to PetroChina's parent company. Was PetroChina an investment to avoid or a risk worth taking? Also raises broader questions about the roles of the state and the private sector.
Examines the prospects for private management in U.S. public schools. Focuses on the education and business strategies of firms seeking to expand as a result of charter school legislation that allowed for-profit entities to enter and compete for students with access to public funding. Focuses on the business and education strategies of three leaders in for-profit education, the Edison Project, Sabis International, and Education Alternatives, Inc. (EAI). Asks whether any of these firms have devised a sustainable strategy for the opportunities and challenges that lay ahead. Uses the education sector to suggest the business imperative not only to devise a strategy to create value, but to establish an overall structure that allows firms to claim a predictable portion of the value they create. Focuses on the opportunities presented by charter school legislation.
A manager's ability to build profitable firms depends upon the business environment within which firms interact. This note presents a framework to help understand, anticipate, and perhaps foster changes in the business environment. Describes building a picture of the business environment as country analysis. The country analysis framework has three interdependent components of strategy, context, and performance. Focuses on identifying and evaluating the national and international context. In particular, clarifies the role state actors, nonfirm organizations, and "rules of the game" can play in firm decision making.
Describes Russia's transition from a centrally planned economy under Communist rule to an increasingly market-oriented economy under a more democratic political regime. Can be used to discuss the complementarity of elements of an economic strategy, and the optimal sequencing of political and economic reforms. The first section provides a brief synopsis of Gorbachev's reform strategy and the political and economic chaos following from partial implementation of relatively weak economic and political reforms. The second section describes Yeltsin's radical reform strategy of 1992 to simultaneously achieve macroeconomic stabilization, price reform and privatization. Attention is drawn to the partial implementation of this program and the political and economic obstacles hindering progress. Concludes by asking whether Yeltsin's attempts to consolidate power through new elections and constitutional reform will be successful.
For decades after the revolution of 1917, Communist Party leaders claimed that the socialist economic system was superior to the capitalist system on both moral and economic grounds. By 1985, when Mikhail Gorbachev became general secretary of the Communist Party of the Soviet Union, the economic claim had been increasingly contradicted by the facts. Soviet per-capita income remained significantly below western levels, and Soviet growth rates had declined steadily since the 1960s. Gorbachev searched for a way out of this economic deterioration announcing a policy of perestroika and glasnost. Had Gorbachev misdiagnosed the problem? Should other options have been pursued? This case outlines the starting conditions for any attempts at economic reform of a socialist system. Describes the economic strategy of allocating resources by command channels rather than allowing resources to be allocated by markets and firms. This clear example of planning leads to deeper understanding of the forms of planning seen in other countries. Successes and failures of this system are noted, with particular attention to the information aggregation and processing demands made on central planners.