May 19, 2020 at 2:54 pm #7144Louis-H. CampagnaParticipant
1. What was the fundamental problem that led to the failure of Arthur Andersen?
The reading suggests Arthur Andersen strayed away from its core values and purpose. Strict accounting rigour for the end of auditing integrity had been its essential business differentiator in the market. When the form traded in this sustainable long term business culture for short term gain (a.k.a., greed), it positioned itself for catastrophic failure. Natural selection did the rest.
2. Who was responsible for this problem?
Though we assume there must have been a string of warnings over the decades, the key moment identified is when the Chairperson of the Board identified the conflict between the firm’s auditing activities versus the more lucrative consulting activities. The Chairperson recommended business segregation of the two activities — splitting the firm in two. The owners of the business overruled the Chairperson, who latter resigned. Though the power dynamics around the Board table at the time were not discussed at any depth, it appears obvious that the owners knew about the Chairperson’s concerns and decided to dismiss them. In this sense, much responsibility lies with the owners. Responsibility also lies with the industry regulators (government) that allowed the industry to combine in a single firm two conflicting business activities — auditing and consulting, the first for the purpose of providing business to the second.
3. What governance decisions could have been made differently to change the outcome of this case?
The owners could have empowered the Board to the end of protecting the long term interests of the firm, the shareholders, and the public, by allowing the segregation of the two business areas.
4. What does the the Arthur Andersen case highlight about broader challenges in corporate governance?
Even when a key player, like the Board Chairperson, clearly identifies an existential threat down the road for the business, greed can still have its day if the owners allow greed to trump a proven, sustainable business culture. As stated in New Testament: “No one can serve two masters, God and money”. You either fall prey to greed, or you stay true to your values. The challenge comes from navigating a firm through the neoliberal mindset of the “growth at any cost” imperative, peppered with tempting opportunities for quick an easy gains at the cost of a firm’s very soul. In corporate governance, values matter.0
May 22, 2020 at 2:05 pm #7394Jen BudneyParticipant
Great response, Louis-H. I’m wondering what your take on the CEO’s responsibility is?1+
May 23, 2020 at 6:30 am #7422James MacFarlaneParticipant
Regarding the CEO who seemed to be above and unaware has some responsibility which resulted in his resignation to save careers and what was left. In the CEO role he is the gatekeeper and whether you acted or were unaware he had responsibility.
Oddly enough Audit firms seldom get challenged even today I sense.1+
June 2, 2020 at 4:45 am #7613Louis-H. CampagnaParticipant
In response to your question about the responsibility carried by the CEO. I’d say, it depends. If the Board insisted that the CEO abide by the Friedman doctrine and place profits for shareholders above all else, then within the bounderies of the law and of summary ethics, can the CEO be blamed fot doing jist that. The CEO’s entire incentive plan would have been built upon short term gain (next quarter) results rather than long term, sustainable, values-aligned results.
So the CEO’s responsibility — though he obviously bears some — is limited to the extent of the agent role this person played, accountable to the principal.1+
June 3, 2020 at 11:38 am #7936Tina NgoParticipant
I agree with all the points you made and comments. I also like to add, as mentioned in the module, building a strong culture and a clear vision can help guide a company in the right direction, but nothing is bulletproof.0
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