McBride Financial Services Governance Evaluation

Topics: Corporate governance, Board of directors, Management Pages: 6 (2094 words) Published: March 5, 2014
Running head: MCBRIDE FINANCIAL SERVICES GOVERNANCE EVALUATION

McBride Financial Services Governance Evaluation

McBride Financial Services Governance Evaluation
This paper will introduce possible corporate governance problems that led up to the scandals in the early 21st century. McBride, an online mortgage financial services organization, might be allured by tempting, unethical practices if they choose not to accept a previously proposed solution to their organizations’ structure. The influence of the governance rating system will be discussed and the implications this influence would have on the McBride organization. Two governance rating methodologies will be discussed and what effects they would have on McBride financial services. Finally corporate American’s reaction to the governance rating industry will be evaluated and McBride will be assessed as to how they will react. The corporate governance problems leading up to the 21st corporate scandals had to do with the way the system is set up. In an article, written by John C. Coffee, Jr., he theorizes on which governance problems led to the 21st scandals. His theory lays in dispersed ownership systems of governance. Coffee (2005), “Dispersed ownership causes …’motives for, financial misconduct has implications both for the utility of gatekeepers as reputational intermediaries and for design of legal controls to protect public shareholders” (pg. 1-10). In the dispersed ownership system it seems to be the managers that cause the accounting misdeeds leading to the scandals. This type of a governance system would be more along the lines that led to the downfall of Enron, Tyco, World-Com, Global Crossing, Imclone among others. This would indicate a governance problem within the way the organization is being monitored and controlled. This also demonstrates a problem in the governance in the accounting area. Too many controllers or “gatekeepers” have to much control in that area. Coffee (2005), “Corporate managers tend to engage in earnings manipulation. …in the cases of Cendant, MicroStrategy, and Sunbeam, three major U.S. corporate scandals in the late 1990s, they found that “these three firms lost more than $23 billion in the week surrounding their respective restatement announcements. …despite the market’s fear of such practices, revenue recognition errors became the dominant cause of restatements in the period from 1997 to 2002” (pg. 1-10). This shows the governance practices regarding revenue recognition was a major governance issue. In concentrated ownership systems it is the shareholders who play the deceit roles. This type of system is more directly related to the way Hugh McBride, of McBride financial services, is setting up the business. Another governance issue was the “rainy day reserves”. Coffee (2005), “ In effect, managers engage in income-smoothing, rolling the peaks in one period over into the valley of the next period; this traditional form of earnings management was intended to mask the volatility of earnings and reassure investors who might have been alarmed by rapid fluctuations in earnings” (pg. 1-10). In this case of rainy day reserves the gatekeepers can misguide the amount of money that actually came in. They report a different amount when the earnings are lower than expected, hoping that in the next quarter the monies coming in will cover the down period and the accounting books will balance out. One more problem in the governance was when the compensation system changed from a cash-based system to an equity-based system. The system changed but the corporate governance controls did not compensate for the change. Coffee (2005), “change in corporate governance to control the predictably perverse incentives that reliance on stock options can create” (pg. 1-10). If Hugh McBride does not accept the previous proposals given to his company (see week three Problem Solution: McBride Financial...

References: Barrett, A., Todd, P., Schlaudecker, C., Perrin, T., . (2004). INSTITUTIONAL SHAREHOLDER SERVICES’ CORPORATE GOVERNANCE QUOTIENT (ISS CGQ). Corporate Governance Ratings. Retrieved from http://www.directorsforum.com/resources/related_articles/corp_gov_ratings3-05.pdf
Brown, L.D. & Caylor, M.L. (2004). A Theory of Corporate Scandals: Corporate Governance and Firm Performance. Social Science Research Network. Retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=586423
Brown, M.S. (n/a). The ratings game: corporate governance ratings and why you should care. Global Corporate Governance. Retrieved from http://www.globalcorporategovernance.com/n_namericas/080_093.htm
Coffee, J.C. jr.  (2005). A Theory of Corporate Scandals: Why the U.S. and Europe Differ. Social Science Research Network. Retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=694581
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Rose, P.  (2007). A Theory of Corporate Scandals: The Corporate Governance Industry. Social Science Research Network. Retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=902900
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