Corporate Governance and Financial Crisis

The ongoing financial crisis has proved that Corporate America and the Corporates in other countries around the world have exhibited behavior that can be described as mismanagement and not keeping in tenets of good corporate governance. In this respect, some of the criticism that has been directed at corporate leaders and the bankers in particular appears to be justified given the excesses that have been on display from them. For instance, excessive CEO compensation is a hot topic in the aftermath of the global financial crisis.

Studies have shown that the CEO’s of some companies like Wal-Mart and GM along with Wall Street Banks take home pay that is 100 to 150 times the average pay of the working class. This is indeed a fact that speaks volumes about the blatant disregard for fair compensation and reflects the skewed priorities of the corporate leaders. After all, what can possibly justify this huge imbalance even after taking into consideration the fact that CEO’s and Bankers are engaged in activities that are cerebral and visionary in nature?

The answer from corporate chieftains is that while these levels of gap between the CEO pay and the average pay are indeed troubling, there is no need to panic since the trickle down economics that they rely on means that the wealth eventually finds its way to the bottom. It is another fact that this has not happened so far in practice and what we have instead is a rising inequality gap. The reason for pointing this aspect is to highlight the kind of corporate governance practices that have seeped into corporates around the world.

The point here is that one reason why the global financial crisis happened was because of the failure of the very vision and direction as well as misplaced faith in markets for which these CEO’s and Bankers were being paid such humungous amounts. Hence, the notion that this aspect reflects good corporate governance has fallen flat on the face.

Another aspect of corporate governance that underlines the ongoing financial crisis is that there were serious issues of transparency and accountability concerning the behavior of the corporate leaders. When they overwhelmingly make the rules that benefit them at the expense of the shareholders and the stakeholders, then there is something wrong with the kind of corporate governance being performed. The fact that the employees in these companies and banks along with the shareholders had to pay the price for the mismanagement of the corporate leaders indicates that there is an urgent need to clean up the stables of corporate governance before it is too late.

Finally, the issues related to pursuit of profits at the expense of social and environmental concerns points to another malaise of the current systems of corporate governance. Hence, taken together these aspects reflect the fact that the current models of corporate governance need a rethink especially when one considers the fact that the global financial crisis was brought about due to excessive greed and reckless risk taking. The bottom line is that corporate leaders must be answerable to the regulators and the shareholders along with the stakeholders and only when there are effective checks and balances to keep the corporate governance on track can we avoid crises like the ongoing global financial crisis.