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AOL/Time Warner and WorldCom:Corporate Governance and the Effects of the Deregulation Paradox
Unformatted Document Text:  7 1. Corporate cultures of intimidation 2. Senior management providing corporate boards with limited information 3. Diffusion of authority 4. The pursuit of subgoals by senior managers that are contrary to the best interests of the company or organization 5. Corporate board members who provide consulting services and are, thereby, beholden to senior management 6. Corporate boards that merely rubber stamp senior management decisions In the worse case scenario, such contributing factors can contribute to what Cohan (2002) calls a “failure of knowledge conditions.” He cites the example of Enron Corporation which illustrates what can happen when there is complete failure in corporate governance. As Turnbull (2002) points out, this case more than any other, has lent new urgency to the debate about the way to properly manage and regulate large organizations. Enron Corporation At Enron Corporation, accounting firm Arthur Anderson told the board’s audit committee in 1999 that Enron was a “maximum risk” client that was “pushing the limits” of appropriate accounting practices. The board chose not challenge Enron’s own internal accounting practices nor did it ask Arthur Anderson to take a more careful approach in auditing Enron’s books (Byrne, 2002). In 2000, the same Enron board approved $750 million in cash bonuses to Enron executives in a year when the company reported net income of $975 million. That represents over 60% of what the company earned that year in net income. It should be noted that the directors at Enron were paid $350,000 a year in cash and stock options to provide professional oversight. Perhaps most telling, was the decision by the Enron board not to address the claims made by Enron employee Sharon S. Watkins regarding the company’s involvement in a series of highly complex multibillion off-the-

Authors: Gershon, Richard. and Alhassan, Abubakar.
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7
1. Corporate cultures of intimidation
2. Senior management providing corporate boards with limited information
3. Diffusion of authority
4. The pursuit of subgoals by senior managers that are contrary to the best
interests of the company or organization
5. Corporate board members who provide consulting services and are,
thereby, beholden to senior management
6. Corporate boards that merely rubber stamp senior management decisions

In the worse case scenario, such contributing factors can contribute to what Cohan (2002)

calls a “failure of knowledge conditions.” He cites the example of Enron Corporation

which illustrates what can happen when there is complete failure in corporate governance.

As Turnbull (2002) points out, this case more than any other, has lent new urgency to the

debate about the way to properly manage and regulate large organizations.
Enron Corporation
At Enron Corporation, accounting firm Arthur Anderson told the board’s audit

committee in 1999 that Enron was a “maximum risk” client that was “pushing the limits”

of appropriate accounting practices. The board chose not challenge Enron’s own internal

accounting practices nor did it ask Arthur Anderson to take a more careful approach in

auditing Enron’s books (Byrne, 2002). In 2000, the same Enron board approved $750

million in cash bonuses to Enron executives in a year when the company reported net income

of $975 million. That represents over 60% of what the company earned that year in net

income. It should be noted that the directors at Enron were paid $350,000 a year in cash and

stock options to provide professional oversight. Perhaps most telling, was the decision

by the Enron board not to address the claims made by Enron employee Sharon S. Watkins

regarding the company’s involvement in a series of highly complex multibillion off-the-


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