CHAPTER 18Chapter ObjectivesI. Corporate Governance—the relationship among stakeholders used to determine and control the strategic direction and performance of an organizationCHAPTER 18CORPORATE GOVERNANCE, ACCOUNTING, AND TAXATIONChapter Objectives To explore the purpose and structure of corporate governance as it is practiced globally To examine the failures in corporate governance in recent years, and how authorities are responding tothese changes To understand how accounting practices differ across countries, and how these differences may alter thecompetitiveness of firms in international markets To isolate which accounting practices are likely to constitute much of the competitiveness debate in thecoming decade To examine the primary differences in international taxation across countries, and in turn how governmentsdeal with both domestic and foreign firms operating in their markets To understand the problems faced by many U.S.-based multinational firms in paying taxes both in foreigncountries and in the United StatesOpening CaseCorporate Inversion and Stanley WorksSummary:This case tells how Stanley Works tried to do a corporate inversion, that is re-incorporate itself as a Bermuda-based corporation with all U.S. operations becoming a wholly-owned subsidiary. This move would have saved Stanley about $30 million annually in taxes. However, due to public outcry as well as opposition from employees, stockholders, and federal authorities, Stanley gave up on the move.Chapter OutlineI. CORPORATE GOVERNANCE—THE RELATIONSHIP AMONG STAKEHOLDERS USED TO DETERMINE AND CONTROL THE STRATEGIC DIRECTION AND PERFORMANCE OF AN ORGANIZATIONA. The Goal of Corporate Governance1. The optimization over time of the returns of shareholders2. To develop and implement strategy that ensures corporate growth and improvement in the value of the corporation’s equity3. OECD statement of good corporate governance practicesa. Protect shareholders’ rightsb. Ensure equitable treatment of all shareholdersc. Recognize the rights of stakeholders and encourage active cooperation with themd. Ensure that timely and accurate disclosure is made on a material matterse. Ensure strategic guidance by the board and its accountability to shareholdersB. The Structure of Corporate Governance (Figure 18.1, page 594)1. The Internal Forcesa. The Board of Directorsb. Officers and Management2. External Forcesa. Equity Markets—analysts depend on financial statements and other public disclosures to evaluate firmb. Debt Markets—also rely on disclosures to evaluate company’s financial healthc. Auditors—must provide external professional opinion as to the fairness and accuracy of corporate financial statementsd. Regulators—watchdogs over the company and its stock tradingC. Comparative Corporate Governance (Table 18.1, page 596)1. Corporate governance structures classified by regimea. Market-based regimes—relatively efficient capital markets in which ownership is widely dispersedb. Family-based regimes—largely controlled by familiesc. Bank-based regimes—government influence in bank lending, family controlled, and practically no private ownership of stockd. Government-based regimes—state ownership of enterprise2. Financial Market Development—the depth and breadth of capital markets is critical to the evolution of corporate governance practices3. Separation of Management and Ownership avoids agency issues4. Disclosure and TransparencyD. The Case of EnronFocus on EthicsEnron’s Board on What Happened at EnronSummary:This statement by Enron’s board says that the blame for what happened is widespread and could and shouldhave been prevented.1. Reported earnings were false2. All of debt was not disclosed3. Massive compensation packages and bonuses were paid to corporate officers4. How this all happened—a. Executive officers managed the board toward own goalsb. Board failed to protect shareholder interestsc. Auditors committed serious errors in judgmentd. Analysts were blinded by the euphoria over successes5. Good Governance and Reputationa. It could have prevent the Enron disasterb. Decides where capital should goc. Affects the company’s reputation and imageE. Corporate Governance Reform1. Subanes-Oxley Act of 2002a. CEOs must vouch for veracity of published financial statementsb. Boards must have audit committees drawn from outside directorsc. Prohibits loans to corporate officers and directors2. Board Structure and Compensationa. Some advocate not allowing CEO to be Chairman of Boardb. Some advocate the formulation of a supervisory board (largely outsiders) and a management board (insiders)c. Some advocate not giving stock options to board members3. Transparency, Accounting, and Auditinga. Transparency—the degree to which an investor can discern the true activities and value drivers of a company from disclosuresb. Accounting—some argue it should not be rule-based, but conceptually based as in Western Europec. Auditing –some argue they should not be paid by the ones the audit4. Minority Shareholder RightsII. Accounting Diversity (Table 18.3, page 603)A. If firms are operating in dissimilar economic situations subject to same accounting treatment, results will appear differentlyB. If firms are operating in same economic situations subject to dissimilar accounting treatment, results will appear differentlyC. If firms are operating in dissimilar economic situations subject to dissimilar accounting treatment, results will appear differentlyIII. Principle Account Differences Across CountriesA. Origins of Differences—linked to differences in people, places, events, and laws that have developedFocus on CultureThe Father of Accounting: Luca Pacioli Who?Summary:This focus explains how it is really impossible to say who really invented with the accounting system we alluse today.B. Classification Systems (Figure 18.4, page 605)1. Micro-based—characteristics of the firms and industriesa. Theoreticalb. Pragmatic (U.S., Canada, Japan, UK, Mexico)2. Macro-uniform—following fundamental government or economic factors per country (European countries)C. Principal Differences: The Issues1. To separate or segment international markets for investors and firms (Table 18.4, page 606)2. Accounting for Research and Development Expensesa. Capitalized because there is no guarantee of benefitsb. Expensed because they are an investment for future benefits3. Accounting for Fixed Assetsa. All countries