CORPORATE GOVERNANCE: INTERNATIONAL PERSPECTIVE

The proper governance of companies will become as crucial to the world economy as the
proper governing of countries... strong corporate governance produces good social progress.
The two go together.
- James Wolfensohn

ABSTRACT
Corporate governance refers to the process by which corporations set and accomplish their
goals in the context of the social, regulatory, and market environments. Monitoring the actions,
policies, procedures, and decisions of corporations, their agents, and affected stakeholders is
among them. This paper addresses the concept corporate governance and the significance of
corporate governance in international scenario, and emphasis on the need of effective and
efficient corporate governance for the long term success of a company and to provide a
safeguard to the involved stakeholders. In this paper the author has discussed the case study of:
Wirecard AG, Germany’s biggest financial tech company and how the poor corporate
governance, inefficiency of German authorities and financial regulatory system was unable to
serve the stakeholders and the involvement of management in unethical practices resulted in
the failure of the ‘Enron of Germany’. The lack of proper supervision from the board of
directors ultimately create the opportunities for management to be involved in illegal and
unethical practices. The government and the financial regulatory authority must keep a check
and make sure companies are following the required policies and take timely steps to reform
financial system.
Keywords: Corporate governance, FinTech, financial scandal, corporate scandal, Wirecard

INTRODUCTION
Concept of Corporate Governance
The term ‘ Corporate’ originates from the Latin word ‘Corpus’ which means ‘body’, or a body
of a group, association or a company; and the term ‘Governance’ is derived from the Latin
word ‘Gubernare’ which means ‘to steer’. In reference of companies, governance means
direction and control of a company. Corporate governance is a system of rules, regulations and
policies to direct, control and keep a check on corporations, these corporations are required to
adhere by the policies, set out to protect the interest of the stakeholders. Corporate governance
entails balancing the interests of a company's various stakeholders, which include shareholders,
senior management executives, customers, suppliers, financiers, the government, and the
investor community.
The Organization for Economic Co-operation and Development (OECD): “Corporate
governance involves a set of relationships between a company’s management, its board, its
shareholders and other stakeholders. Corporate governance also provides the structure through
which the objectives of the company are set, and the means of attaining those objectives and
monitoring performance are determined.”1
The Cadbury Committee Report has defined Corporate Governance as “the system by which
business corporations are directed and controlled. Further, the report states: “Within that
overall framework, the specifically financial aspects of corporate governance (the Committee’s
remit) are the way in which boards set financial policy and oversee its implementation,
including the use of financial controls, and the process whereby they report on the activities
and progress of the company to the shareholders.”2
The Institute of Company Secretaries of India has also defined the term Corporate Governance,
as “corporate governance is the application of best management practices, compliance of law
in true letter and spirit and adherence to ethical standards for effective management and
distribution of wealth and discharge of social responsibility for sustainable development of all
stakeholders”. It is an area of economics that emphasizes evolving institutional structures to
regulate the contract, organizational designs and legislations. It motivates the shareholders and
encourages the managers to deliver better returns on investments.
The Confederation of Indian Industry (CII) defined the term stating that “Corporate governance
deals with laws, procedures, practices and implicit rules that determine a company’s ability to
take managerial decisions vis-à-vis its stakeholders—in particular, its shareholders, investors,
creditors, customers, government and employees. There is a global consensus about the
objective of ‘good’ corporate governance: maximising long-term shareholder value.”3
Corporate governance also provides a framework for achieving a company's goals; it
encompasses almost every aspect of management, from action plans and internal controls to
performance measurement and corporate disclosure. Good corporate governance enables
organizations to establish trust within the investor community. As a result, corporate
governance promotes financial viability by providing market participants with a long-term
investment opportunity. Corporate governance refers to the process by which corporations set
and accomplish their goals in the context of the social, regulatory, and market environments.
Monitoring the actions, policies, procedures, and decisions of corporations, their agents, and
affected stakeholders is among them. Corporate governance practices can be viewed as
attempts to align stakeholders' interests. . Corporate governance measures can be thought of as
initiatives to bring stakeholders' interests closer together. The major goal of CG is to facilitate
effective, entrepreneurial, and prudent management that will ensure the company's long-term
success. The necessity for corporate governance stems from the requirement to avoid conflicts
of interest among business stakeholders.

Significance of Corporate Governance

1
OECD (2015), G20/OECD Principles of Corporate Governance, Paris: OECD Publishing. http://dx.doi.org/10.1787/9789264236882-en
2
The Cadbury Committee, (1992) The Financial Aspects of Corporate Governance, London: Gee (a division of Professional Publishing
Ltd) https://ecgi.global/sites/default/files//codes/documents/cadbury.pdf
3
Mistry, K (2020), The CII Code, New Delhi: Confederation of Indian Industry (CII)
https://www.cii.in/pdf/CII%20Guidelines%20on%20Integrity%20Transparency%20in%20Governance%20and%20Responsible%20Code%
20of%20Conduct_Feb%202020_Final.pdf
Today, Corporate Governance has become increasingly crucial in influencing investors’
perceptions, managerial structure and corporate legitimacy. When a company follows good
corporate governance practices, with full discloser, this builds public trust on the company and
its brand, which resultantly will help the company's reputation thrive.
Good corporate governance aids the company in managing risks and reducing the likelihood
of corruption. When directors and top management of a company are not obligated to follow a
clear governance code, scandals and fraud are more likely to occur. A good corporate
governance structure will ensure the safety of company's members, officers, and management
and other stakeholders. They will be safeguarded if the corporation keeps its records in the
company books and maintains its statutory registers.
The goal of corporate governance is to contribute to the creation of an environment that fosters
long-term investment, financial stability and company integrity, resulting in stronger growth
and more inclusive societies. Good corporate governance will lead to better ethics and
excellence.
Corporate governance has been proven as a vital ingredient in the management and growth of
companies, and it will continue to do so in the future. To improve the operations of the business,
it is recommended that all companies adopt required policies to improve the quality of their
corporate governance systems. A good corporate governance structure ensures that
organizations make the best use of their resources. Good corporate governance also ensures
that organizations consider the interests of a diverse variety of stakeholders, as well as the
communities it serves, and that their boards of directors are accountable to the firm and its
shareholders.

Major development on International level

The origin of ‘Corporate Governance’ can be traced to 16th and 17th century, however it came
into vogue in 1970s in the United States and within 3 decades it became the subject of debate
and discussion among scholars, investors and executives.
The federal Security and Exchange Commission of US incorporated the term ‘corporate
governance’ on the official reform agenda in mid 70s. The S.E.C. was beginning to consider
managerial accountability issues as part of its regulatory mandate. The discovery of widespread
illicit payments by US corporations to foreign officials in the mid-1970s drew the S.E.C. further
into the corporate governance realm. In 1976, the Securities and Exchange Commission urged
the New York Stock Exchange to change its listing requirements to require each listed company
to maintain an audit committee comprised of independent directors. However, the S.E.C.
ultimately refrained from enacting major changes, with key reforms limited to requiring
publicly traded firms to disclose information on the independence of their directors and the use
of audit, nomination and compensation committees.
Prior to 1990s, the term corporate governance was not much popular in Britain. The trend began
to shift when the accountancy profession, the London Stock Exchange, and the Financial
Reporting Council, formed the Committee on the Financial Aspects of Corporate Governance
in 1991 named the Cadbury Committee with Adrian Cadbury as the Chairperson. The Cadbury
Committee codified its recommendations in a Code of Best Practice and arranged for
enforcement by compelling the London Stock Exchange to add the Code as an appendix to the
London Stock Exchange's listing rules, requiring listed companies to either comply with the
Code's provisions or explain their failure to do such. The Cadbury Code ultimately become a
model for developing corporate governance codes in countries all over the world.
In 1999, 30 member countries of OECD adopted the ‘OECD Principles of Corporate
Governance’, “a set of corporate governance standards and guidelines.” “The OECD Principles
represent the first initiative by an inter-governmental organisation to develop the core elements
of a good corporate governance regime. As such, the Principles can be used as a benchmark by
governments as they evaluate and improve their laws and regulations. They also can be used
by private sector parties that have a role in developing corporate governance systems and best
practices.” 4 OECD principles took a major step towards the development of common
international understanding of essential characteristics of good corporate governance.

CASE STUDY
Germany – Wirecard AG
Wirecard AG originally founded in 1999, is a financial tech company, based in Munich,
Germany, according to its Article of Associations. engaged in providing services to the
financial sector. With the object of the development, operation and marketing of
information services, conception and realization of technical applications, services and
projects in the field of payment systems as well as all the associated businesses
including the acquisition and granting of licenses in the financial services sector.

In 2002, Wirecard was merged with Electronic Banking Systems, another Munich
based rival fintech company under the directive of CEO Markus Braun. In 2005, it
joined the Frankfurt stock market, allegedly to avoid the scrutiny of an initial public
offering, by taking over an inoperative call centre group, InfoGenie AG. In 2006,
Wirecard purchased XCOM and moved to banking renaming itself as Wirecard Bank.
In 2008 suspicions of fraudulent accounting, money laundering and M&A activities
were raised challenging the integrity of the business. The head of German shareholder
association issued an attack on irregularities in balance sheet of Wirecard. After the
allegations, EY took over as the main auditor of Wirecard and conducted a special audit.
Resultantly, the German authorities prosecuted two persons, Tobias Bosler and Markus
Straub, due to insufficient disclosure of holding Wirecard's stock.
From 2006 to 2018, Wirecard aggressively expanded its business to International level,
by first entering into Asia in 2007; New Zealand, Australia, South Africa and Turkey
in 2014; USA and Brazil in 2016; and in 2019 SoftBank a Japanese holding company
invested in Wirecard and in the same year it entered the market of China with the
acquisition of AllScore Payment Services; having bases in Germany, Dublin and Dubai.
These expansions were done by third-party dealings and escrow accounts.

Financial Times was keeping a close watch on Wirecard, starting from April 2015,
Financial Times started to publish blog series “House of Wirecard” of FT Alphaville,

4
OECD (1999), Principles of Corporate Governance, Paris, OECD Publishing
https://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=C/MIN(99)6&docLanguage=En
 pointing out various irregularities in the accounts and balance sheets of Wirecard. In
2016, anonymous short sellers under the pseudonym of ‘Zatarra’, known as ‘Zatarra
Report’, published claims related to accounting irregularities and money laundering,
which were denied by Wirecard as false and slanderous and accused Zatarra report of
market manipulation. In response to the Zatarra scandal, BaFin launched a market
manipulation investigation into it and potential short-sellers associated with Zatarra.
Ironically, BaFin did not conduct a thorough investigation into the allegations levelled
against Wirecard. Despite a series of similar allegations made against Wirecard by
various individuals and organisations, Wirecard continued to expand operations in the
absence of a thorough regulatory investigation. Thus, auditor EY and regulator BaFin
both demonstrated fiduciary and regulatory negligence. After monitoring closely for
years and investigation into Wirecard, Dan McCrum from The Financial
Times published an article accusing Wirecard of accounting irregularities, including
“forgery and/or of falsification of accounts” and “cheating, criminal breach of trust,
corruption and/or money laundering” , predominantly concerning the markets of Asia.
BaFin took a step banned short selling of Wirecard stocks for two months. 2019,
Wirecard postponed publication of its annual audit report and admitted unaccounted
1.9 billion euros, which technically never existed. This confirmed long-standing
allegations of accounting irregularities and fraud raised against Wirecard by various
sources.

FT did some more reporting, this time on fraudulently inflated profit from the Middle
East and Europe, as well as the misclassification of cash held in escrow accounts,
prompted the company to commission a special audit by KPMG. When that report was
delivered in March 2020, KMPG stated that it was unable to verify the majority of
Wirecard profits reported from 2016 to 2018, or €1 billion in purported cash balances.
Despite being Wirecard's auditor for more than a decade, EY had not performed routine
audit verification checks with a Singapore bank that Wirecard claimed held large cash
balances in the previous three years. The KMPG auditor admitted that nearly 2 billion
euros presumably transferred by Singapore bank to two most likely non-existent
Philippine banks had been rejected as “spurious”. Nearly half of the company's business
appears to have been fictitious, and the "real" business – conducted in the EU and the
US – has been reported by KPMG to be unprofitable since 2016.

In 2016, CEO Markus Braun was arrested on charges related with fraud and false
accounting. COO Jan Marsalek fled and disappeared and the company Wirecard
announced it was to file for insolvency.

CONCLUSION
The importance of good corporate governance cannot be overstated. The goal of corporate
governance is to protect and enhance shareholder value while simultaneously considering the
interests of other stakeholders. The failure of Wirecard was caused by the series of illicit
activities that grew so large that bankruptcy was unavoidable. This is a clear case of
misalignment of interests between management and stakeholders. The relevant authorities in
Germany and other European countries will need to reform the current financial regulation of
fintech and other relevant sectors in order to strengthen their Corporate Governance system.
Conflict between investors and managers has existed for centuries and will continue to be a
source of concern as long as business is conducted through the corporate structure. Future
economic crises and business scandals will undoubtedly rekindle concerns about corporate and
executive accountability. To make the mission of corporate governance meaningful, it is
desired that the Board of Directors adopt a significant change in their perceptions. In their new
role as corporate governors, company directors must rise above personal desire and aptitude.
Corporate governance is increasingly being recognized as an essential element of long-term
economic growth. Strong governance is important for promoting growth, improving access to
low-cost capital, ensuring appropriate risk mitigation, and increasing the economy's overall
productive capacity. Corporate earnings are no longer the exclusive measure of success, and
global acknowledgment of corporations' power and responsibilities is growing. As time passes
and the world becomes more aware of the most pressing challenges, governance will continue
to evolve, with investors and boards defining and leading the way. The endeavor of good
governance is an ongoing process that requires the continuous adoption of best practices to
ensure truth, transparency, accountability, and responsibility in all dealings with employees,
shareholders, consumers, and the public at large.