Week 2:

Assignment 1 Corporate Governance (Cemento Argos , Buenaventura and CPFL Energia)

Cemento Argos

When Argos decided to adopt good governance practices, it faced an almost complete lack of
knowledge on the subject in the Colombian market. It was essential for Argos to convey to the
market what corporate governance was, and that the principles of good governance were not just a
fad—they were here to stay. 2 Companies Circle The company initially adopted a basic Code, which
was subsequently amended in light of international benchmarks. The revised Code, emphasizing
aspects of disclosure and free flow of information, was discussed with a variety of stakeholders, from
employees to the Board of Directors. Argos challenged itself to comply with the highest corporate
governance standards advocated by international organizations, following recommendations by its
shareholders, the Board of Directors and other stakeholders. In 2004, Argos finalized and published
its Good Governance Code, which complies with the great majority of the NYSE, OECD, World Bank
and local institutions’ recommendations. Argos lives up to its motto, “Adding Value Every Day” in its
relationships with all stakeholders. Its structure of governance focuses on five main pillars: fair
treatment of shareholders; strengthening the structure and performance of the Board of Directors;
developing procedures to provide accurate, complete and timely information; establishing an ethics
code for employees; and regulating relations with different interest groups. Finally and notably, it
was decided that both internal and external auditors should review and inform the market of Argos’
compliance with its Good Governance Code. International investors and pension funds are important
Argos shareholders. The major shareholder bloc is composed of the largest industrial group in
Colombia. Around 46% is held by public investors.

1-) Argos decided to adopt good governance practices, it faced an almost complete lack of
knowledge on the subject in the Colombian market.

Argos challenged itself to comply with the highest corporate governance standards advocated by
international organizations, following recommendations by its shareholders, the Board of Directors
and other stakeholders. Its main challenges are strengthening its Board of Directors and the Board
committees.
2-) Argos lives up to its motto, “Adding Value Every Day” in its relationships with all stakeholders. Its
structure of governance focuses on five main pillars: fair treatment of shareholders; strengthening
the structure and performance of the Board of Directors; developing procedures to provide accurate,
complete and timely information; establishing an ethics code for employees; and regulating relations
with different interest groups.

3-) - They are trying to improve their corporate governance system.

- It is difficult to precisely measure the direct benefits of adopting good governance practices, but
Argos can point to substantive results. Its shares have steadily increased in value: Argos’ stock
climbed 68% during 2004, and was up 40% through August 2005. The company does not rule out the
possibility of issuing shares on the NYSE in the future.

Bueneventura

1-) Buenaventura suffered several years of losses that ultimately led to a high level of debt amid
Peru’s weak economic environment during the 1980s. In the early 1990s, however, Peru emerged
into a period of greater stability, allowing Buenaventura to plan for a more promising future.

When the company decided to invest in Yanacocha, now a world class gold deposit, Buenaventura
faced high-cost exploration and development investments.

Convinced that the market pays for good corporate governance practices, Buenaventura chose to
cancel its debt with the proceeds of an initial public offering (IPO) of ADRs on the NYSE in 1996.

The decision reflected Buenaventura’s Board of Directors’ and management’s commitment to

2-)Buenaventura has implemented a comprehensive set of rules to ensure good governance. The
reforms were inspired by the recommendations of major international organizations, such as the
OECD and the World Bank/IFC.The decision to convert all shares into a single class of common shares
served to keep the controlling group together, and was also considered the best way to continue to
maximize the value of the company. The stock’s liquidity was bolstered as a result, as investors
responded positively to the single voting class of shares. In the event of a tender offer, the Board
must review the proposal and make its recommendations to all shareholders, who in turn make their
own decisions on whether to

accept the offer. Buenaventura takes voting rights seriously. To facilitate the participation of all
shareholders in General Meetings, the company calls Meetings 25 days in advance and provides
shareholders the Meeting’s agenda. ADR holders receive proxies through the depositary bank and
special procedures have been put in place to ensure that ADR holders have sufficient time to
consider how to vote and that their votes are duly represented at General Meetings.

3-) Buenaventura recognizes that it must continue to improve its governance framework as it strives
to maximize shareholder value. Its governance improvements are clearly recognized by the market,
as demonstrated by its three-fold increase in market capitalization, from around US$ 400 million to
US$ 3.6 billion. The company reported

net revenue of US$ 316 million in 2004, generating operating income of US$ 86.6 million in that year.
Today, Buenaventura is working on complying with the Sarbanes-Oxley requirements. The company
expects to be certified by external auditors as Sarbanes-Oxley compliant in June 2006.

CPFL ENERGİA

1-) The main challenge facing CPFL Energia S.A., the largest private company in Brazilian electricity
sector, following ownership reorganization and a series of acquisitions was to establish a balanced
relationship among its partners. The challenge was acute, particularly given the large number of
controlling shareholders – eight.

CPFL ENERGİA has a complex ownership structure and the need for clear decision-making process
drove the Company towards a very intensive and expedited path of adopting good governance
practices, culminating with the decision to adhere voluntarily to the BOVESPA’s Novo

Mercado requirements. Management’s energetic response to the firm decision to carry out these
governance reforms was essential to give velocity to the process.

2-) After privatization of CPFL Paulista in 1997, and especially after the constitution of the
holding company, CPFL Energia, in 2002, the Group had to implement a completely new set of
corporate governance practices with the objective of maintaining cohesion among the controlling
shareholders, organizing the decision-making process, opening access to capital, achieving higher
operating performance, and maximizing financial returns to all shareholders.

CPFL Energia then, among other things, has taken the following steps:

- Aligned its bylaws to meet the Novo Mercado requirements for listing;

- Aligned the bylaws of the controlled companies (which had different origins due to privatization)
with its bylaws;

- Created seven Advisory Committees to support the Board of Directors;

- Mandated its Fiscal Board to fulfill the requirements of the Sarbanes-Oxley Act;

- Rationalized the Board meetings of its controlled companies;

- Created an internet site for the Board of Directors; and

- Organized a Compliance Division.

3-CPFL Energia succeeded in reversing the net loss of R$ 12 million in the first quarter of 2004,
achieving positive net income of R$ 166 million in the first quarter of 2005. The Company’s gross
revenue reached R$ 2.5 billion, representing an increase of 14.2% and net revenue reached R$ 1.8
billion, a 15.4% growth. EBITDA added up to R$ 507 million, indicating a 20.7% increase, compared to
the same period last year. Debt was reduced by 12.8% and the Company’s indebtedness profile
improved. The Company’s free float will present an estimated increase of 1.3% in the next twelve
months, due to the IFC’s conversion of its loan into CPFL Energia’s shares. Furthermore, an energy
consumption increase of 4.3% in CPFL Energia’s area of operations and 7.2% demand increase in
concession areas indicate that there are good reasons for consistent growth and positive results at
CPFL Energia. Company shares begin to show the results when compared with the BOVESPA index
and the energy sector index.

Assignment 3: Video Case: Serious Corporate Governance Scandals

1- Applying evidence from recently available public information on Enron, I defined Enron’s culture as
one rooted in agency theory by asserting that Enron’s members were predominantly agency-
reasoning individuals. I then identified conditions present at Enron’s collapse: a strong agency culture
with collectively non-compliant norms, a munificent rare-failure environment, and new hires with
little business ethics training. Turning to four possible antidotes (selection, objectivist integrity,
integrity capacity, and stewardship reasoning) to an agency culture under these conditions, I argued
that the currently available ethics literature would have made little difference toward averting
Enron’s collapse if any of the recommendations from the relevant ethics literature had been
implemented. I conclude by identifying new directions for business ethics literature in order to make
it more implementable under the conditions identified at Enron. Essentially, we need a way to clearly
determine (1) the difference between connivance and commitment, (2) what is meant by balance
with regard to the multiple dimensions of ethics and legal theories, and (3) the proper balance
between agency and stewardship reasoning.

The task of the board of directors is to oversee the company’s activities and thereby maximize its
value. Further, it has to fulfill three specific functions: have expertized members, ensure the
company does not breach any law and that information given to external are accurate as well as to
evolve a business plan. However, not complying with these requirements has led to Enron’s
corporate failure. The involvement of the board and its wrong-doing will be explained in the
following.

On the one hand, Enron’s board at least partially achieved these requirements. It consisted of several
well expertized and experienced individuals from business, legal and political areas. However,
financial structures of Enron were greatly complex and difficult to understand for external. Even if
they had tried to understand the structures they would have probably gotten confused.

Further reasons why the board did not discover any inconsistencies in the firm’s statements will be
outlined at this point.
Firstly, the board was heavily deceived by management, in particular by Skilling and Lay. They did not
have full access to information and those information they received were falsified or incomplete.

Secondly, members of Enron’s board were not independent since a lot of the directors found
themselves in a conflict of interest as they also provided capital for special pulpose entities or
peculiar donations have been made to chiefly related companies. For example, one of the director
was also chairman at a cancer center and Enron started to pay for this particular center since then

Thirdly, corporate governance mies in 2001 existed but their outcome did not correspond to the
intention of their creators. By using the example of Enron’s audit committee which was a
subcommittee of the board the problem of the existing mies becomes obvious: Members of the
committee had also been paid with stock. This conduct might have encouraged them to help cover
up discrepancies in financial statements since an increasing stock value was also profitable for them
(bavelle, 2002; Byrne, 2002).

On the other hand, Enron had a tough and aggressive corporate culture. Each decision was based on
how to raise the stock’s price; norms and ethical values were neglected.

For instance, a remuneration and evaluation system was established which allowed to assess
employees’ perfomiance. Their overall performance and commitment for Enron was scaled into a
ranking from 1 to 5. With 1 being the lowest category the respective employee risked being fired if
performance does not improve in the close future. Moreover, good performance was compensated
with stock and employees were also heavily encouraged to invest cash-based compensation in stock.

In addition, corporate culture was based on mistrust. Management purposely kept division separate
and independent from each other in order to increase competition and achieve better results.
Further, nobody was able to get a big picture of Enron and understand its complex structures.

2- After reviewing and understanding the basics of fraud, how the Enron scandal unfolded, how the
accounting world reacted to this scandal, and the positives and negatives of the Sarbanes-Oxley Act
of 2002, a few things can be observed. With the opportunity for an employee to commit fraud being
so common from examples such as poor upper management, an aggressive financial reporting
attitude in a company, or unreliable and ineffective controls, deregulation within the business world
only fueled a fraudulent company from committing crimes.

In the early 2000s, SOX had to be created. The increase in financial statement fraud and the lack of
action from auditors gave a reason for the formation of Sarbanes-Oxley and the PCAOB. Now, over
15 years after those frauds were committed, the business world has changed so much. Although
there is some opposition towards the PCAOB, I believe it should remain as a checks and balances for
auditors and public companies. The PCAOB has successfully grown and adapted with the economy to
guide companies towards transparency and honesty. However, I do agree with some of the support
towards repealing SOX.

Because so many public companies have now either gone private or have established their grounds
in another country in order to avoid the regulations SOX imposes, I believe that business men and
women are completely discouraged to establish themselves as an American company. Corporations
are not only avoiding establishment in the U.S because of SOX, but also because of the decreased tax
rates in most other countries. Bringing some of those big corporations back to America may be
happening soon. President Trump recently proposed reducing the corporate tax rate from 35% to
20%. This dramatic cut will definitely entice current and future business owners to establish
themselves in America; however, the audit fees associated with being a public company are not
decreasing anytime soon. Therefore, I think the money that would not be spent in taxes would just
be spent in audit fees for public companies moving to America, and those companies moving back to
the U.S. may not be saving any money.

3- (I)Accounting scandals are business scandals which arise from intentional manipulation of
financial statements with the disclosure of financial misdeeds by trusted executives of corporations
or governments. Such misdeeds typically involve complex methods for misusing or misdirecting
funds, overstating revenues, understating expenses, overstating the value of corporate assets, or
underreporting the existence of liabilities (this can be done either manually, or by the means of deep
learning). It involves an employee, account, or corporation itself and is misleading to investors and
shareholders.

This type of "creative accounting" can amount to fraud, and investigations are typically launched by
government oversight agencies, such as the Securities and Exchange Commission (SEC) in the United
States. Employees who commit accounting fraud at the request of their employers are subject to
personal criminal prosecution.

The fraud triangle is a model for explaining the factors that cause someone to commit fraudulent
behaviors in accounting. It consists of three components, which together, lead to fraudulent
behavior:

Incentives/ Pressure: Management or other employees have incentives or pressures to commit

Opportunities: Circumstances provide opportunities for management or employees to commit fraud.

(II) Accounting Problems;

The conventional wisdom is that it was "innovative" accounting practices and their consequences
that started the tide of losses that brought the energy giant down. Enron collapsed not so much
because it had gotten too big, but because it was perceived to be much bigger than it really was in
the first place. By decentralizing its operations into numerous subsidiaries and shell corporations,
Enron was able to hide huge derivative losses that would have halted its growth much sooner if
widely understood. Publicly traded corporations are required to make their financial statements
public, but Enron's finances were an impenetrable maze of carefully crafted imaginary transactions
between itself and its subsidiaries that masked its true financial state. In other words, losses were
held off the book by subsidiary companies, while assets were stated.

Fallout From Fraud;

Taken at its word, this rosy scenario made the company the darling of Wall Street, and it was able
to borrow almost endlessly and expand into e-commerce and other questionable ventures. Its stock
literally soared, which made employee compensation and pensions in the form of stock options seem
very attractive. But what were already considered accounting practices on the edge of acceptable
standards were eventually revealed to be outright fraudulent. The disgrace drove so much business
away from and created such liability for accounting firm Arthur Anderson that it was itself forced out
of business. By this time, though, the true value of the company had been revealed and the stock
price collapsed, leaving employees with worthless options and pension packages. Of course,
executives that understood the real picture sold their shares in advance of the collapsed and waltzed
away with billions.

Management Culture;

Of course, the Enron fiasco did not happen by accident. It was facilitated by a corporate culture
that encouraged greed and fraud, as exemplified by the energy traders who extorted California
energy consumers. Rather than focus on creating real value, management's only goal was in
maintaining the appearance of value, and therefore a rising stock price. This was exacerbated by a
fiercely competitive corporate culture that rewarded results at any cost. Some divisions of Enron
replaced as much as 15 percent of its work force annually, leaving employees to scramble for any
advantage they could find to justify their continued employment.

Preferential Treatment

While the internal integrity of the company remained thusly challenged, the facade was the exact
opposite. The company leveraged political connections in both the Clinton and Bush administrations,
as well as on Wall Street, for preferential treatment and the air of legitimacy that allowed it to
perpetrate its frauds. In this context, the accounting practices widely considered the cause of the
Enron collapse can be seen as just a symptom of a larger management culture that exemplified the
dark side of American capitalism.

4-) Corporate governance refers to the way a company directs and controls its institutional systems,
ethics and accounts. It focuses on promoting transparency and fairness within establishments and
organizations by monitoring performance and ensuring accountability. In that regard, external
auditors serve as one of the primary protectors of corporate governance in any organization. In
keeping with the 2002 Sarbanes–Oxley Act, external audits are required of most publicly listed
companies. They will provide;

Promote accountability

Risk Assessment and Mitigation Planning

Crisis Management

Maintain Strong Relationship with Regulators

(II)Criticize the role of Arthur Anderson & Co in the Enron Scandal.

When Enron Corporation collapsed in late 2001 under inquiries of possible financial improprieties,
many interested parties, including investors, employees, regulators, and the media, immediately
questioned how such a collapse could occur under the watchful eye of one of the most prestigious
international public accounting firms, Arthur Andersen LLP. After Enron filed for bankruptcy
protection in the U. S. Bankruptcy Court, an independent examiner was appointed by the Court to
answer many of the questions that had surfaced about Enron and the role Andersen played in
Enron’s collapse. The report of the examiner offers chilling insight into the extent that Enron went to
circumvent the intent of Generally Accepted Accounting Principles (GAAP), while attempting to
produce a covering of technical compliance, all with the advice and support of its auditors. The Enron
accounting violations raise questions about the rules-based approach to accounting standards in the
U. S. and whether a principles-based approach might have prevented some or all of the Enron
accounting violations. Analysis of the response of the U. S. Congress and securities regulators to the
Enron debacle reveals a concerted effort by the government to prevent similar corporate failures in
the future and to reassure the investing public.

Levent Burak Sezgin 150211008