There is a massive difference between governments introducing regulations to drive desired behaviour, and government establishing the environment conducive to creating desired behaviour.
With over 2.5 million small business owners in Australia, generating regulation becomes an industry in and of itself, trying to establish the good corporate citizenry that we would like to see in our commercial enterprises is incredibly difficult and often not fails to deliver the intended outcome.
Government regulation is expensive to implement and administer which place strain on the public purse, making it more difficult to deliver desired services we want to see from our governments. Even if it achieved the intent behind the regulation there is a much better way for government to be effective.
No government wants to be irrelevant
The problem with governments, which switch from big policy statements to one where they establish market conditions with incentive as the driver of behaviour is just that… They don’t have any big policy statements to announce, a government which goes quietly about protecting our individual freedoms won’t be heard in the media cycle and they know they won’t get re-elected!
Major Major Major Major’s name was a conundrum for the lead character in Joseph Kellers novel Catch-22. General Disaster would perhaps be more appropriate to describe the outcomes of the problem politicians face when making policy decisions on implementing regulation, act in the interests of the people or their party!
To my mind it should be a simple exercise, create the market conditions which remove unfair or abuse of competitive advantage by establishing proportionate penalties that have so high a consequence that corporations at all levels dare not act in any other way than being great corporate citizens.
The outcome would be much smaller government bureaucracy and the behaviour that we would love to see. It would only take the first Company Director to pay the consequences and the rest would be on their best behaviour. Instead of money in the economy being tied up in government agendas, it would be released into the commercial arena where economic output is generated.
Corporate fraud is real none bigger than Enron
Enron Corporation (former New York Stock Exchange ticker symbol ENE) was an American energy, commodities, and services company based in Houston, Texas.
Before its bankruptcy on December 2, 2001, Enron employed approximately 20,000 staff and was one of the world’s major electricity, natural gas, communications, and pulp and paper companies, with claimed revenues of nearly $111 billion during 2000. Fortune named Enron “America’s Most Innovative Company” for six consecutive years.
At the end of 2001, it was revealed that its reported financial condition was sustained substantially by an institutionalized, systematic, and creatively planned accounting fraud, known since as the Enron scandal. Enron has since become a well-known example of willful corporate fraud and corruption. The scandal also brought into question the accounting practices and activities of many corporations in the United States and was a factor in the creation of the Sarbanes–Oxley Act of 2002.
The scandal also affected the greater business world by causing the dissolution of the Arthur Andersen accounting firm.
Enron filed for bankruptcy in the Southern District of New York during late 2001 and selected Weil, Gotshal & Manges as its bankruptcy counsel. It ended its bankruptcy during November 2004, pursuant to a court-approved plan of reorganization, after one of the most complex bankruptcy cases in U.S. history. A new board of directors changed the name of Enron to Enron Creditors Recovery Corp., and emphasized reorganizing and liquidating certain operations and assets of the pre-bankruptcy Enron.
On September 7, 2006, Enron sold Prisma Energy International Inc., its last remaining business, to Ashmore Energy International Ltd. (now AEI).
Major banks exposed include Abbey National, ANZ, Bear Stearns, Canadian Imperial Bank of Commerce, Chubb Corp, Citigroup, Commonwealth Bank, Crédit Lyonnais, ING Group, JP Morgan, Mitsubishi UFJ Financial Group, National Australia Bank, Nikko Cordial, Principle Financial, Sanwa Bank, Sony Bank, Sumitomo Mitsui Financial Group, and Westpac.
Government response was regulation that did not deliver…
The history of Enron is useful to illustrate the consequences of corporate fraud, not only were banks exposed but many peoples pension funds were invested in Enron and these evaporated with its collapse also.
Shaken to its core at the depth of the collapse the US Congress implemented the Sarbane-Oxley Act to ensure that Company Directors were forced into accountability with a paper trail basically confirming their good governance on every major transaction.
Sarbane-Oxley is most definitely a well intentioned regulation, the problem is that since its implementation it has not detected the collapse of a single corporation before its demise, and far more importantly general consensus is that it has added around 5-10% as an expense cost to businesses to meet their compliance obligations. Money which adds no value to your purchase as a consumer but which you pay for.
We are not just talking about fortune 500 companies here; it goes all the way down to small business corporates who may only be turning over revenues in the one million dollar magnitude.
Worse still, if you thought that it’s the only the USA anyway and doesn’t affect you here in Australia, you’d be wrong. Overseas operations of US companies still have to comply with the Sarbanes-Oxley Act and there are accountants here in Australia and other countries that specialise in this area of compliance. The costs are very real around the world.
A far better approach
If the legislation has had such a high cost and not delivered its intended outcome, why was it introduced and persisted with? Simply its good politics to be seen to be doing the right thing by mum and dad investors in voter land than to be perceived to be doing nothing.
If there was a system of proportionate penalties in place, much like the way we have progressive taxation as you earn more money; companies of much bigger magnitude and therefore risk to investors would attract far greater penalties than a sole shareholder company for example. What we need to create is a system where individuals have far more to lose than they hope to gain from their fraudulent activities.
The incentive needs to be right for Directors to act in the best interests and needs of the enterprise they are responsible for, not their own back pockets.
Yours in Successful Small Businesses…