Agency Assurance - Universität St.Gallen

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CHAPTER 1.
The Compelling Need for Corporate Governance Reform
1.1 Fallout of the Stock Market Crash of 2000
1.1.1 Incurred Losses and Unrealized Gains
Aftermath. There is no other word more appropriate for describing the contemporary
situation of the world economy early in the 21 st century. The stock market bubble
burst, and over a matter of weeks, global wealth was reduced by trillions of dollars.
Hundreds of thousands lost their jobs or even worse, saw their prospects for living
above the mere subsistence level fade away. Much of the world has been experiencing
an economic turnaround, but it is most appropriately called a ‘sputtering recovery’.
The relatively long time it is taking for stability in the financial markets to take hold
constantly reminds us we remain living with the after-effects of a post disaster period.
Some find comfort in the fact that the loss of wealth was mainly ‘on paper’. What
they mean by this is that most of the wealth that vanished was actually created over a
relatively short period of just a few years at the close of the 20 th century. Prices for
shares of the worlds’ corporations were bid up by investors to unsustainable levels. In
the aftermath those prices have ‘simply’ returned to pre-bubble levels. Investors are
still rich, just not as rich as they had come to believe they were. Unfortunately, this is
only the case on an aggregate level. The fallout was very damaging to many less
fortunate members and groups of society.
It is true that there were many investors with losses whose earlier gains offset these
losses. While they are no doubt disappointed, they will get by without much effect on
their lifestyles. However there are also many who lost almost everything. They are
the late entrants to the stock markets, the young and foreign investors enticed not only
by the gains experienced by their American ‘neighbors but also by the misleading
messages of professional financial advisors and corporate executives, who themselves
received inordinate amounts of compensation in stock options, commissions, and
bonuses as markets climbed, money which they did not have to return as markets
crashed. They are ex-employees of now bankrupt organizations whose savings were
primarily invested in company stock, who have neither their savings nor their job in