CHAPTER 5
Corporate Governance and the Sarbanes-Oxley Act
STUDY OBJECTIVES
This chapter will help you gain an understanding of the following concepts:
An overview of corporate governance
Participants in the corporate governance process
The functions within the corporate governance process
The history of corporate governance
The Sarbanes–Oxley Act of 2002
The impact of the Sarbanes–Oxley Act on corporate governance
The importance of corporate governance in the study of accounting information systems
Ethics and corporate governance
The Procter & Gamble Company (P&G) is well known for its best-selling brands such as Jif® peanut butter, Crest® toothpaste, and Pampers® diapers. In addition to its successful consumer products, P&G has also gained recognition for its success in the area of corporate governance.
P&G has been recognized on Barron's “World's Most Respected Companies” list, Fortune's “Most Admired” list, and as Business Ethics magazine's “Best Corporate Citizen.” In 2004 and 2005, P&G received the highest possible rating for corporate governance by Governance Metrics International (GMI), an independent research and ratings agency. Thousands of companies have been rated by GMI, with only 1 percent earning this top rating.
P&G's reputation is so impressive because it focuses on doing what is right; all levels of personnel stress integrity in all aspects of their work. Its commitment to corporate governance is based upon the following components:1
- An active and diligent board of directors provides effective oversight and interaction with management and investors.
- Strong internal controls protect the company's assets and information, and ensure compliance with applicable regulations, accounting standards, and disclosure requirements.
- Financial stewardship programs and activities provide discipline in decision-making, responsibility to investors, and accountability for actions.
- A code of conduct sets forth high ethical standards for all employees.
Companies like P&G can benefit from being recognized as leaders in corporate governance. Rewards may be realized in terms of increased loyalty from investors, customers, and employees. Research indicates that when companies stress corporate governance, they tend to reap financial benefits such as higher returns and lower cost of capital.
The pages that follow demonstrate that there are many ways of defining corporate governance. However, regardless of the variations in the definition, the essence of corporate governance is embodied in P&G's framework of commitment to corporate governance, as previously described. The points used in P&G's framework will provide the basis for defining corporate governance in this text.
The remainder of this chapter addresses the importance of corporate governance in a modern business environment, as well as some related historical, legal, and ethical perspectives.