Submit a 5- to 7-page briefing that details the new strategic plan.

Dyer, J. H., Godfrey, P., Jensen, R., & Bryce, D. (2016). Strategic management: Concepts and tools for creating real world strategy. Hoboken, NJ: John Wiley & Sons.

Enron’s board of directors followed many of the recognized best practices for corporate governance: the directors were all experienced, the board had a code of ethics in place to protect against fraud and other abuses, and the audit committee, the group of directors who oversee the firm’s financial reporting process, was composed of directors from outside the company. Investigators later learned that Enron’s board of directors had actually voted to suspend its own code of ethics before it chose to establish many of the off-balance-sheet entities that would eventually destroy the company. In other words, the board knew it was violating its own guidelines, but with the stock price rising, which director would want to put the brakes on growth?6 A U.S. Senate committee concluded:

The Enron Board of Directors failed to safeguard Enron shareholders . . . by allowing Enron to engage in high risk accounting, inappropriate conflict of interest transactions, extensive undisclosed off-the-books activities, and excessive

executive compensation. The Board witnessed numerous indications of questionable practices by Enron management over several years, but chose to ignore them to the detriment of Enron shareholders, employees and business associates.7

What did the collapse of Enron cost? Shareholders lost over $63 billion in total value, over 20,000 Enron employees were affected, and another 90,000 employees and partners of Enron’s auditor Arthur Andersen saw their jobs disappear. CFO and architect of many of Enron’s accounting tricks, Andrew Fastow, spent six years in prison, and Jeff Skilling received a 24-year prison sentence for his leadership of the company (later reduced to 14 years after he struck a deal with U.S. prosecutors to pay more than $40 million to victims and end his appeals). Millions of California power uses paid higher utility bills and suffered from power blackouts due in part to Enron’s deception. Finally, every public company in the United States saw its costs increase and its environment become more comple␣x with the passage of the Sarbanes–Oxley (SOX) Act in 2002.8

Enron’s spectacular and costly collapse highlights the issues, challenges, and problems of corporate governance and the importance of ethical behavior. You may be thinking, “Just what is governance? I thought that we elected governors but corporations hired managers?” In this chapter, we’ll use a metaphor that should help you visualize the importance of good corporate governance. The metaphor comes from the history of the word govern. The English word govern traces its root back to in the ancient Latin word gubernare, which meant to steer or pilot a ship.

This metaphor paints an accurate picture of governance; it’s about steering the corporation. The notion of steering raises three simple questions about governance that all corporations must answer: Where will we steer the corporation? Who will act as the pilot? How will we steer, or what principles will guide the journey? This chapter is organized around these three key questions.

THE PURPOSES OF THE CORPORATION

If we ask where we want to steer anything, be it a boat, a car, or a business, we are also ask- ing where we want to end up, or what the goal is that we are trying to achieve. In terms of corporate governance, this question is often worded in one of two ways: What is the pur- pose of the corporation? Or, who is the corporation run for? A corporation is a legal struc- ture for organizing a business where the corporation is considered a distinct and separate entity from its owners, also known as shareholders. For the last 80 years, those questions have had at least two answers. The corporation should either be run for the shareholders or be run for the stakeholders. To understand the implications of these answers, it is important to understand a little about the history and evolution of the corporation in the United States.

For the first 100 years of our nation’s history, corporations were very rare. Most economic activity was carried out by individual proprietorships, where the same person owned and ran the business. Many small businesses today still operate as proprietorships. Some busi- nesses operated as partnerships, a business owned by two or more partners. Today, law firms, accounting firms, medical practices, and other professional service firms organize as partnerships. Corporations that issued stock, or shares of ownership, to investors were rare. If you wanted to form a corporation, you had to go to the state legislature to obtain

corporate governance The processes and structures that provide the ultimate decision- making authority for the firm

Corporation A legal structure for organizing where the organization is a distinct and separate entity from its owners, also known as shareholders.

individual proprietorship A legal structure for organizing where the same person owns and runs the business.

partnerships A legal structure for organizing where the owners of a business share ownership. The partnership is not separate from its owners.

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