Deconstructing Sunbeam - Contemporary Issues in Corporate Governance

Abstract

Corporate governance has become a commercial mantra, yet there exists a tension between competing visions of its primary goal. While early developments in corporate governance tended to focus on an accountability rationale, during the 1990s there was a significant shift toward an efficiency rationale for corporate governance. The dramatic events at Sunbeam in 1998, involving the removal of CEO, Albert Dunlap, reflected this tension. They also highlighted a number of important issues in contemporary corporate governance debate, including board composition; the role and responsibilities of outside directors; remuneration of executives and directors; and relational investing.

This article, which was written as a case study at the time of these developments at Sunbeam, provides insights into the incentives for accounting manipulation in the contemporary commercial environment, and the benefits and limitations of governance mechanisms in controlling such conduct. The article also argued that the Sunbeam saga should not be treated as an example of one individual's fall from grace and therefore dismissed as an isolated event. Rather, the article contended that a commercial culture stressing short-term profit maximization, together with the rhetoric of contemporary remuneration orthodoxy based on alignment of managerial and shareholder interests, may provide strong incentives for manipulation of accounting records and create systemic problems in the commercial environment. The subsequent fall-out from more recent corporate scandals, such as Enron and WorldCom, seems to have reinforced the dangers and perverse incentives which may be created by a corporate culture, such as existed at Sunbeam.

Keywords: Comparative corporate governance, Sunbeam, corporate scandals, boards, independent directors, directors' duties, alignment of interests, executive compensation, performance-based pay, relational investing

JEL Classification: G 34; J 33; K22, K33; K 40; K 42; M 14; M 52