vol. XV no. 3

				Timing right for change Some of the NYSE recommendations, such as independence of key board committees, are not new ideas in the arena of corporate governance. Neither are the calls for accounting reforms. "We always need a crisis before reform takes place," remarked Michael Rebello, associate professor of finance at the Robinson College. "Before, the stock market was doing well. The system seemed to be working." In June, the system came to a screeching halt on the heels of scandals that rocked some of the country's largest businesses. Arthur Andersen executives were convicted of federal obstruction of justice for destruction of Enron auditing records. Former top executives at Rite Aid were indicted on charges involving inflating earnings and destroying evidence. Tyco International, Adelphia Communications and Dynegy were embroiled in accusations of using financial gimmicks to falsely inflate cash flow. Then WorldCom Inc. admitted it had improperly declared more than $3.8 billion in income. In studying the history of the stock market, Rebello has tracked crashes, which occur approximately every 50 years. He attributed these crashes to a combination of poor ethics and big business in an article published in American Economic Review in 1993. "In a period of excess, an unethical group can profit the most, " Rebello said. "Once the market crashes, we weed out the unethical people, and eventually the market rebounds." Although official reforms to counter the current crash began in earnest only recently, corporate governance structures have been evolving for the last 15 to 20 years, according to Omesh Kini, finance associate professor. For example, Kini noted a trend from the 1960s to the 1990s toward more outside representation on corporate boards. Pressure from institutional investors and managers of large pension funds has increased board oversight. Today, some 75 percent of U.S. boards are made up of independent directors chosen from outside the company. In addition, Kini commented, "there is a trend away from the same person holding the dual position of CEO and chairman of the board." As early as 1992, the Cadbury Committee launched a reform movement in the United Kingdom with recommendations for a code of best practice for corporate governance. The policy required that at least three members of the board be chosen from outside the company and that the CEO and chairman of the board positions be held by different people. According to research published in the Journal of Finance, scholars found an increased turnover in CEOs after the publication of the committee's reforms. The turnover of top managers attributed to poor performance became more common and was concentrated among companies that adopted the code. "The issuance of the code and its implementation made an impact on these firms," Kini said. Top | Next Page See NYSE Guidelines, in brief.

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