Corporate fraud scandals have recently made headlines across the globe. Exposure of these scandals has resulted in unspeakable losses for the business involved, both in monetary value and in damage to their reputations.
Over the years, the US has been hit hard by several significant corporate fraud scandals that have resulted in millions of collective losses. While the reported incidents are a wake-up call, they are only the tip of the iceberg for corporate criminal activity.
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Corporations must have trusted advisors and decision-makers who value and prioritise governance and make it a business cornerstone to prevent intentional or unintentional fraudulent activity.
SpringerLink published a report early this year stating that 10% of large publicly traded firms commit undetected securities fraud yearly. With detected and undetected fraud considered, 1.6% of equity value each year is lost, equal to $830 billion in 2021 alone.
All Is Not Gold That Glitters
No stranger to corporate scandals, the US is home to some of the most notorious swindling stories. Last year, Sam Bankman-Fried, former CEO of now collapsed centralised cryptocurrency exchange FTX faced an eight-point fraud indictment alleging he defrauded customers and investors and violated campaign finance laws. The scandal is said to be one of the “biggest frauds in financial history”, and the trial is still ongoing.
Another major incident from last year involved one of the most powerful banks in the United States, Wells Fargo. Executives allowed and actioned conditions that enabled large-scale fraudulent activity, resulting in the Federal Reserve capping the bank’s growth at just under $2 trillion until after the trial.
Being one of several fraud allegations Wells Fargo has faced and corporate governance clearly on the back burner, the company continues to see its longstanding name tattered by persistent poor corporate governance.
Theranos, a blood-testing startup, collapsed in 2018 after a dramatic stage of events left CEO and founder Elizabeth Holmes charged with fraud, misleading investors, and deliberately making false statements on the abilities of Theranos technology.
With the company valued at $9 billion before its fall, this scandal is a textbook example of what can go wrong when leaders disregard the importance of corporate governance. If not for employee whistleblowers, the reality of Theranos technology being completely fake could have continued.
The Common Denominator
Poor corporate governance is the common denominator within all scandals. Every single example given, along with the many not discussed and yet to be discovered, should warn corporates to prioritise good governance within their boards and executives. Failure to do so can lead to disastrous consequences, as many businesses have painfully discovered.
The disregard for governance can result in company collapses and reduces investor trust significantly. Who would want to invest in a company that has misused previous investor funds? Reputational damage is often not forgotten and is a major public relations headache for companies to progress through.
Investors have campaigned for and demanded businesses take more deliberate approaches to maintain ESG initiatives, specifically the importance of governance. In addition to this demand, the Department of Justice (DOJ) announced a new policy last year that increases the liability for businesses and individuals committing white-collar crimes.
Good Governance And How To Get There
Establishing an effective, educated board is essential to good governance. With regulations, laws, policies and the like continually changing, board members need more than just previous experience. Continual efforts to develop professionally to keep with the current expectations for business are critical to maintaining a business on track.
Not only does this bring reputational benefits, but it also brings in increased investment. PWC predicts ESG-focused institutional investments will climb to 84% in 2026, reinforcing that investors have a sharp eye on a business’ ESG practices.
Education and transparency within boards and at the executive level are crucial now more than ever. As we develop new standards for corporate businesses, we must keep implementing best practices to prevent reputational damage and increase investor trust.
About the Author
David W. Duffy, CEO and co-founder of the Corporate Governance Institute, argues corporations must uphold governance standards as investors shift their focus to ESG.
About the Corporate Governance institute
The Corporate Governance Institute is the global leader in educating and certifying existing and aspiring boardroom directors. The Institute provides board directors with education and certification to the highest standards.