Strategic CSR - Stakeholder vigilance

The article in the url below highlights the importance of stakeholder vigilance in shaping corporate behavior. The article summarizes research that is published in an accounting journal identifying how earnings misstatements spread via contagion within an industry:

 

"One bad corporate apple, it seems, can spoil a whole bunch. That's the conclusion of a fascinating academic study that examined accounting restatements by thousands of corporations over a 12-year period. After one company was found to have misstated its earnings, the study determined, others in its industry often followed suit and began massaging their own numbers, ultimately resulting in their own restatements."

 

What is more important, however, is the effect of public naming and shaming on that contagion process:

 

"When companies playing accounting charades faced regulatory action, shareholder litigation or prominent news reports about their practices, the researchers found that their corporate peers declined to mimic their conduct. This shows the importance of highlighting and punishing bad behavior."

 

In other words, when stakeholders stood up and held firms to account, the practices were less likely to spread. For example:

 

"For the three years after Sarbanes-Oxley went into effect, contagion in earnings misstatements disappeared, the academics found. But memories are short. The study provided evidence that the copycat behavior resumed in 2005 and continued through 2008, when the research concluded."

 

There is also plenty of evidence to suggest, therefore, that as the vigilance abated, misbehavior returned:

 

"Class-action lawsuits and news reports critical of manipulative conduct reduce the likelihood that other companies will mimic the behavior, the study found. By contrast, restatements disclosed in a news release that receives little attention tend to encourage others to follow suit."

 

In other words, the important aspect of this research is not that contagion is real (we know that from social networks research), but that the contagion stops when stakeholders intervene and remains stymied when that vigilance is sustained over time.

 

Take care

David

 

David Chandler & Bill Werther

Strategic Corporate Social Responsibility: Stakeholders, Globalization, and Sustainable Value Creation (3e)

© Sage Publications, 2014

 

Instructor Teaching and Student Study Site: http://www.sagepub.com/chandler3e/

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/

 

 

Cooking The Books In Bunches

By Gretchen Morgenson

October 25, 2015

The New York Times

Late Edition – Final

BU1

http://www.nytimes.com/2015/10/25/business/earnings-misstatements-come-in-bunches-study-says.html

 

Strategic CSR - Dodd-Frank

When whole industries overstep the bounds of socially-determined acceptable behavior, the government steps into legislate. This intervention produced Sarbanes-Oxley in 2002, in response to the corporate scandals that occurred in the early years of this century (in particular, the collapse of Enron); as a result of the more recent Financial Crisis, it generated the Dodd-Frank Act in 2010:

“Wall Street has found a common enemy: the Dodd-Frank Act. After the industry’s aggressive risk-taking nearly toppled the financial system and the broader economy, Congress ushered in Dodd-Frank, the most significant regulatory overhaul since the Great Depression.”

This process is the basis of the Rational Argument for CSR (Chapter 1, p16). From this perspective, firms have an incentive to adopt a CSR perspective proactively because the alternative (i.e., government intervention) is usually not an efficient solution to whatever problem is being tackled:

“CSR is a rational argument for businesses seeking to maximize their performance by minimizing restrictions on operations. In today’s globalizing world, where individuals and activist organizations feel empowered to enact change, CSR represents a means of anticipating and reflecting societal concerns to minimize operational and financial constraints on business.”

Although they have no-one to blame but themselves, rather than self-reflection and altered behavior, the general response from many firms within the finance industry is resistance:

“Since the law was passed in 2010, banks and other financial institutions have sought to tone down the most onerous aspects of the law, fearful of the threat to their businesses and their bottom line.”

The potential for amendments is presented by the extensive nature of the law—it is large and, at the time of passing, undefined:

“The law takes up some 2,300 pages and touches nearly every corner of the banking industry. … As regulators have devised the myriad rules, Wall Street has embarked on an all-out lobbying blitz. The industry has doled out hundreds of millions of dollars, held regular meetings with regulators and bombarded federal agencies with public letters.”

As a result, and due to the excessive influence of money in modern politics, the industry’s efforts are beginning to bear fruit:

“The industry’s efforts have proved effective. Despite facing tight deadlines, regulators have completed only a third of the regulations mandated under Dodd-Frank. Another third of the rules are in the proposal phase, and the rest are in limbo.”

There are some good graphics that accompany the article and make aspects of the law a little more accessible:

http://www.nytimes.com/interactive/2012/12/11/business/Deconstructing-Dodd-Frank.html

Take care

David

Bill Werther & David Chandler

Strategic Corporate Social Responsibility: Stakeholders in a Global Environment (2e)

© Sage Publications, 2011

http://www.sagepub.com/strategiccsr2e/

Instructor Teaching Site: http://www.sagepub.com/strategiccsr/

The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/

Deconstructing Dodd-Frank

By Ben Protess

December 12, 2012

The New York Times

Late Edition – Final

F12

http://dealbook.nytimes.com/2012/12/11/deconstructing-dodd-frank/

Strategic CSR - Auditors

The article in the url below centers around a straight forward question:

“Should accountants have term limits?”

The inertia in firm relations with their auditors is shocking:

“Since the Securities Act of 1933, public companies have been required to get independent audits each year, assuring investors that a fresh set of eyes has inspected the books. But those eyes aren't always the freshest. According to Audit Analytics, a research firm in Sutton, Mass., 30% of the 1,000 leading U.S. companies have used the same firm to audit their books for at least a quarter-century. Fully 11% have used the same audit firm continuously for 50 years or more. Eight companies haven't changed auditors in at least a century.”

Corporate governance best practice suggests that this degree of longevity does nothing to increase active oversight of executive decision making. Vested interests within the auditing profession, however, indicate that meaningful change will be difficult:

“The Public Company Accounting Oversight Board, which regulates auditing firms, is asking whether long tenure might lead to complacency. Late last year, the board sought opinions on whether it should require listed companies to rotate their accounting firms every few years. The last of those 611 public comments came in to the PCAOB earlier this month. An overwhelming 94% were opposed to term limits. The common refrain: Rotating audit firms every few years would raise costs, reduce the familiarity of accountants with a company's books and impair the quality of audits.”

Take care

David

Bill Werther & David Chandler

Strategic Corporate Social Responsibility: Stakeholders in a Global Environment (2e)

© Sage Publications, 2011

http://www.sagepub.com/strategiccsr2e/

Instructor Teaching Site: http://www.sagepub.com/strategiccsr/

The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/

One Cure for Accounting Shenanigans

The Intelligent Investor

By Jason Zweig

The Wall Street Journal

January 14-15, 2012

pB1

http://online.wsj.com/article/SB10001424052970203721704577159062085026058.html

Strategic CSR - SOX

The article in the url below summarizes a report by the Government Accountability Project (“an advocacy group that provides legal advice to whistleblowers,” http://www.whistleblower.org/) that criticizes the 2002 Sarbanes-Oxley (SOX) legislation for failing to protect corporate whistleblowers (Issues: Corporate Governance—Reporting, p108). In particular, the report highlights the very narrow interpretation of the legislation, which is leading courts to favor companies over individuals:

“Many cases against defendant companies have been dismissed on the grounds that employees who worked for a corporate subsidiary are not necessarily covered by the whistleblower provision, according to Richard Moberly, a University of Nebraska law professor. "The provision is supposed to be interpreted broadly but it is being interpreted very narrowly," he says.”

In spite of the fact that the protection of whistleblowers was one of the central reasons for passing the legislation, the results of 1,273 complaints that have been filed under SOX indicate that the odds are still stacked in favor of large corporations:

“According to data from the Department of Labor, it has ruled in favour of whistleblowers 17 times in the 1,273 complaints filed from 2002 to the start of this month. Meanwhile, 841 cases were dismissed, 162 were withdrawn and 107 are pending.”

Take care
Dave

Bill Werther & David Chandler
Strategic Corporate Social Responsibility
© Sage Publications, 2006
http://www.sagepub.com/Werther

US legislation 'fails' to help corporate whistleblowers achieve justice
By Joanna Chung in New York
409 words
10 September 2008
Financial Times
USA Ed2
04
http://www.ft.com/cms/s/0/f7ba2db6-7ecf-11dd-b1af-000077b07658.html

Strategic CSR - SOX

The article in the url link below reports an important legal decision in the U.S. that enhances whistleblower protection under the Sarbanes-Oxley legislation. The story was considered important enough by the FT to put on its front page (Issues: Corporate Governance—Reporting, p108):

“Employees of US-listed companies who blow the whistle on fraud that took place in the US can be protected under the Sarbanes-Oxley law even if they are based beyond US shores.”

U.S. courts hade been reluctant to establish such protections before because of issues surrounding jurisdiction outside U.S. territory (Issues: Litigation, p245). The difference in this case was decided by the court to be that:

“[The plaintiff] could be protected because measures allegedly taken against her by the company were orchestrated in the US.”

Take care
Dave

Bill Werther & David Chandler
Strategic Corporate Social Responsibility
© Sage Publications, 2006
http://www.sagepub.com/Werther

Court extends Sarbox protection to whistleblowers outside US.
By JEREMY GRANT
402 words
15 February 2008
Financial Times
Asia Ed1
Page 13
http://www.ft.com/cms/s/0/5cad98a8-db32-11dc-9fdd-0000779fd2ac.html
or
http://us.ft.com/ftgateway/superpage.ft?news_id=fto021420081719578376&page=1