Question

Answer theses question fully and in detail. These questions are related to ASX Corporate Governance Council requirement for all listed companies to have a majority of "independent" board members.

1. What new agency conflicts would be created if director’s independence was compromise in regards to holding significant shareholdings in the company?

2. Statistic for Australian company's failure due to directors independecy comprosmised?

Answer 1

1.In the US, directors often have a duty of loyalty toward the company’s shareholders. The idea of maximizing shareholder value came from Milton Friedman,

who proposed that executives and directors should focus solely on creating value for shareholders. Others argue that since the directors and executives are

paid by the company, they are employees of the company – not of the shareholders – so they should thus focus on the interests of the company rather than on those of the shareholders.

According to Lynn Stout, a distinguished professor of corporate and business law at Cornell Law School, shareholder value maximization is a choice, not a legal requirement. The assumption that shareholders are principals and that directors are their agents is legally incorrect.

Corporate law clearly states that shareholders cannot control directors or executives. They have the right to vote on the positions of the directors of the board and recover

damage compensation from directors and executives if they are found to have stolen from the company but they have no right to tell executives how to run the company.

Being loyal to shareholders is, in any case, easier said than done. Shareholders come and go and their interest in the company is limited to their shareholding period.

Shareholder’s interests vary depending on their investment horizon, degree of diversification and investment strategy. Given the many types of shareholders, reaching a consensus for all of them is a daunting task. Ordinary individuals and families who invest for their retirement or to fund future expenses are often represented by institutional investors such as sovereign wealth funds, banks, hedge funds, pension funds, insurance companies and other financia

l institutions. These powerful representatives interact with board members frequently and exercise most of the pressure, but when

they put personal interest before that of the ultimate shareholders, interests could be misaligned. For example, the representatives may be striving

for short-term personal gain or compensation while the ultimate investors may want the same as all other stakeholders: the creation and preservation of the corporation’s long-term sustainable wealth.

Companys Failure Due to Independency of director Compromised;

(1) Fiduciary Failure. The Board of Directors

failed to safeguard shareholders and contributed to

the collapse of the seventh largest public company in the

United States, by allowing to engage in high risk

accounting, inappropriate conflict of interest transactions,

extensive undisclosed off-the-books activities, and excessive executive compensation. The Board witnessed numerous indications of questionable practices by management over several years, but chose to ignore them to the

detriment of shareholders, employees and business

associates.

(2) High Risk Accounting. The Board of Directors knowingly allowed to engage in high risk accounting practices.

(3) Inappropriate Conflicts of Interest. Despite clear

conflicts of interest, the Board of Directors approved

an unprecedented arrangement allowing ’s Chief Financial Officer to establish and operate the LJM private

equity funds which transacted business with and

profited at ’s expense. The Board exercised inadequate oversight of LJM transaction and compensation

controls and failed to protect shareholders from unfair dealing.

(4) Extensive Undisclosed Off-The-Books Activity.

The Board of Directors knowingly allowed to

conduct billions of dollars in off-the-books activity to make

its financial condition appear better than it was and failed

to ensure adequate public disclosure of material off-thebooks liabilities that contributed to ’s collapse.

(5) Excessive Compensation. The Board of Directors approved excessive compensation for company executives, failed to monitor the cumulative cash drain

caused by ’s 2000 annual bonus and performance

unit plans, and failed to monitor or halt abuse by Board

Chairman and Chief Executive Officer Kenneth Lay of a

company-financed, multi-million dollar, personal credit

line.

(6) Lack of Independence. The independence of the

Board of Directors was compromised by financial

ties between the company and certain Board members.

The Board also failed to ensure the independence of the

company’s auditor, allowing Andersen to provide internal

audit and consulting services while serving as ’s outside audit