Deja vu? 200 years on, regulators still can’t control corporate badboys

7 April 2009

It's been over 200 years, punctuated by voluminous and extensive legislation, but governments and regulators are no closer to controlling corporate misbehaviour, historical analysis by Deakin University's corporate governance expert Jean Du Plessis has found.

Over the centuries several attempts were made to ensure good corporate governance practices, he explained in an article for a UK legal journal (The Company Lawyer). "But it would seem that despite their efforts, solutions to the vital issue of how to govern, control and regulate fundamental and rather basic issues like 'conflicts of interests' still continue to elude Governments and regulators alike."

Professor Du Plessis said the answer was not more legislation or regulation, but better coordination between government bodies and proper enforcement of existing laws.

"The market will have collapses, but what needs to be clearer is where the primary corporate regulator, in Australia's case the Australian Securities and Investments Commission (ASIC), responsibility begins and ends, when does it need to send out a warning. Similarly what is the level of coordination between the different regulators like the Australian Tax Office (ATO) and ASIC when say a company has not paid its taxes for a considerable period of time. Does the ATO have a responsibility to inform ASIC?"

Professor Du Plessis said the first attempts to control corporate misbehaviour started in 1720 and the most spectacular crash in English financial history – known as the bursting of the South Sea Bubble.

"The spectacular trading mania in useless stock that preceded the crash is well-recorded and provides some of the most fascinating reading in financial and corporate law history," he said.

"But the behaviours exhibited at that time will be familiar today. The directors of the South Sea Company, no different from some recent examples, used every possible trick and device then known to inflate the value of the South Sea stock. They made bear-sales, which added to the panic, they then made loans on the South Sea stock; handsome dividends were promised in the shape of 'divisions' out of surplus stock; and treatises were issued to prove that these distributions could be made good etc."

Professor Du Plessis said the reaction to the collapse, then as now, was the prosecution and jailing of directors and officials of the company, and calls for closer scrutiny by regulators of the activities of other corporations' directors and managers.

In 1844 a Parliamentary enquiry into the activities of 'joint stock companies' (companies where shares are sold to raise capital) outlined the structures of the companies that were likely to cause the most problems and the ways their directors were most likely to go about it.

"The examples of abuses and forms of misleading and deceptive conduct listed in 1844 and subsequently in 1938 shows that very little has changed," Professor Du Plessis said.

"The corporate governance issues mentioned are exactly the same as those that became prominent in the late 1990s and early 2000 with the collapse of the dot.com bubble and the collapses of Enron, Parmalat and HIH." Professor Du Plessis also points out that there seems to be similarities between recent corporate collapses like Chartwell Enterprises, the Geelong-based company, and conduct by directors reported on in the 1844 Report. In that 1844 Report, under the striking heading, "The Amount and Distribution of the Plunder", it is explained that the mode of distributing the plunder varied: "Sometimes it is taken by the leaders, and shared among the others; sometimes it assumes the form of a high fixed payment, disproportionate to the service of the individual and to the means of the Company". Even the profile of the people who suffered most by several scams reported on prior to 1844 in the UK seem to match that of investors who suffered most with the Pyramid Building Society collapse and the collapse of Chartwell Enterprises. "In 1844 it was reported that the victims were usually persons of limited means, who invested their savings in order to obtain very high returns on their investments. In 1844 it was reported that 'old people, governesses, servants and people of that description" were tempted to invest the little they had and when the concerns collapsed they were ruined.

Professor Du Plessis points out that the 1844 report describes in colourful terms how certain companies had the appearance of validity, by having "an array of Directors and Officers, announce a large capital, adopt the style and title of a company, issue plausible statements, intimating excellent purposes, declare that they are sanctioned or empowered by Act of Parliament, use some conspicuous place of business, in a respectable situation, and employ throughout the country respectable agents and bankers". However, it was pointed out that many of these virtues were simply fictitious. It was explained that the directors have either not sanctioned the use of their names or they were not the persons they were supposed to be and in actual fact these companies had no capital! "The golden parachute termination payouts to directors highlighted in various enquiries in 1995, 1998 and 2003 echoes the description "distributing the Plunder" outlined in the 1844 report.

"Nobody could now aver that concerns about corporate governance and striving for good corporate governance are a new or recent phenomena.

"As the business environment becomes more and more complex and, as more and more experience is gained, governments and their regulators, as well as the courts, seem to be chasing the wind even more often nowadays."

 

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