Corporate Governance (2nd edition)

Citation

Kanthi Herath, S. (2008), "Corporate Governance (2nd edition)", Corporate Governance, Vol. 8 No. 1, pp. 109-111. https://doi.org/10.1108/14720700810853446

The second edition of this text continues the authors' efforts to provide a comprehensive and standard textbook on corporate governance. The first of its kind, this textbook provides an overview of the US corporate governance system in a very flexible format. It is the best corporate governance text to supplement for a number of courses such as corporate finance, accounting, business law, and a variety of management courses including strategy and ethics for both the graduate and undergraduate levels. Additionally, this book is appropriate to be used as the sole text in an MBA module focused on corporate governance. It can also be used for executive training programs and can serve as an excellent reference for executive and academic libraries.

Corporate governance is about how corporations use their restricted funds to generate financial wealth for their shareholders and societal wealth for the community. Several years ago, the term corporate governance was for the most part academic jargon. The situation is, however, different today as the term is familiar to almost everyone. Regrettably, its acquaintance came about with the revelations and news of corporate misdeeds. Enron and WorldCom gave two famous examples of corporate scandals that led to their eventual demise. Many shareholders lost their wealth and their faith and trust in corporate America as a result of corporate misdeeds. At present, everyone from shareholders to politicians is calling for better ways to monitor corporate America. It is obvious that corporate America has an extensive system of corporate governance. The system, however, has never been ideal and we have begun to notice it only very recently. This textbook is the first textbook dedicated to modern corporate governance and the finest part of the text is a number of examples from the corporate world that make the reading very motivating.

The text has 11 chapters. This edition has been rigorously improved to give a comprehensive understanding of the system of corporate governance. Three brand new chapters have been added to the second edition. Chapter 8 discusses how poorly performing companies are taken over by other companies while Chapter 10 provides a discussion on new corporate governance regulations. Chapter 11 is about the corporate social responsibility, the latest evolution of the stakeholder view of the firm. Another change in this edition is the combination of the “investment banks” and “financial analysts” chapters into the “investment banks and securities analysts” in Chapter 5. This chapter now has a discussion on the results of the Securities and Exchange Commission (SEC) investigations into analyst bias and investment bank incentives. Chapter 6 has been revised to include a discussion on the creditor as a monitor.

Chapter 1 provides an overview of the US Corporation. In this chapter, the authors justify why effective corporate governance is needed. Authors consider that there are eight basic ways in which corporations can be successfully monitored. After the first chapter, the rest of the book is organized into ten chapters. The first eight chapters discuss each of the corporate governance mechanism. Each chapter of the text follows the same format. Each chapter is self‐contained. Every chapter presents a detailed overview of the corporate monitor or monitoring mechanism and highlights potential problems. Every chapter provides real‐world examples to illustrate these problems which are a great strength of the text. Every chapter provides an international perspective and a list of web sites that provides the latest developments in corporate governance. Every chapter has Review Questions based on the chapter reading and Discussion Questions that facilitate class discussion. Each chapter offers exercises that assist students in further understanding chapter material. Every chapter provides Exercises for non‐US Students that help them to dig into corporate governance mechanisms in their countries. US students will also benefit from learning about corporate governance in different countries.

Chapter 2 focuses on executive incentives as a solution for the agency problem that results form the separation of ownership and control of the Corporation. The chapter discusses how executive incentives play an important role in aligning manager and shareholder interests.

Chapter 3 concentrates on accountants and auditors which is an important part of the corporate monitoring system. The chapter provides an overview of accounting and auditing and then discusses how accountants and auditors might contribute to financial fraud and how they might disclose fraud.

Chapter 4 concentrates on corporate boards of directors. It discusses the important role of boards of directors in reducing problems inherent in the separation of ownership and control. The chapter also highlights potential problems with boards of directors.

Chapter 5 deals with investment banks and securities analysts. The chapter first discusses the vital role of investment banks in the American corporate system. The chapter then discusses the important role of analysts in evaluating a firm's performance and making trade recommendations.

Chapter 6 is about creditors and credit rating agencies. It first discusses the role of institutions and investors as monitors of corporate governance. Then the chapter discusses the role of rating agencies in rating bonds for potential investors.

Chapter 7 concentrates on shareholders and shareholder activism. It discusses how individual and institutional shareholders can exert a variety of influence over the firm that they own. It also focuses on the problems and constraints faced by institutional shareholders.

Chapter 8 deals with corporate takeovers as a governance mechanism. This chapter first provides a brief overview of takeover mechanisms. Then the chapter discusses how firms and their managers defend against unwanted takeovers.

Chapter 9 is about the SEC. The chapter first provides and overview of the SEC by a discussion of the securities acts, the SEC organizational structure, and the complexities it has in carrying out its morning role.

Chapter 10 deals with the new governance rules. It first provides an overview of Sarbanes‐Oxley Act (Public Company Accounting reform and Investor Protection Act of 2002). Then it discusses the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations system (NASDAQ) corporate governance rules imposed on their listed companies.

Chapter 11 discusses corporate governance from the perspective of agency theory. The chapter elaborates the shareholder view of the firm and describes problems with the view, which makes it difficult to use this view to ensure good corporate governance.

This text has a 2007 copyright and I highly value the up‐to‐date material. The authors have continued to offer a full range of ancillary materials through Instructors' Resource Center Online (IRC). Power Point slides and Test Banks are very useful to the instructor. Authors also give some useful ideas, together with a sample syllabus, to instructors in structuring the course.

In summary, the second edition is a textbook worthy of adoption, which provides comprehensive coverage of corporate governance. It is an excellent textbook for instructors to teach corporate governance anywhere in the world.