Corporate Governance And Collapse Of Companies

Characteristics of Corporate Governance

Discuss about the Corporate Governance and Collapse of Companies.

The Introduction of the principles of corporate governance in Australia in 2003 was a huge turning point for companies in terms of management. This came in the backdrop of the collapse of major companies as a result of unethical behavior and poor corporate governance practice. As such, the framework was meant to change management styles and place more responsibility on the key stakeholders (Buchanan, 2004). Central to the principles was to increase accountability among the boards of directors of companies so that their style would be supportive of the new corporate governance outlines.

The fundamental characteristic endorsed by the corporate governance principles of 2003 is diversity. The composition of BODs of companies enlisted on ASX was required to exercise some degree of diversity in terms of age and gender. These boards ought to have a balance of gender and age so that the decisions made are reflective of the same (Jackling & Johl, 2009). This resolution was made in response to the realization that most of the companies that had collapsed had limited diversity and as such, key decisions were made void of inclusivity of age and gender. For instance, only 10% of Australian firms had female directors before their collapse. Therefore, as part of the compliance process, there was a need to bring the balance and enhance inclusivity.

Another characteristic of the BODs of companies listed on ASX is independence. Before the introduction of the new corporate governance principles, companies had both independent and non-executive directors. However, after a series of collapses involving companies like Harris Scarfe and One Tel, the role of non-executive directors was scrapped and their functions merged with the independent directors. This meant that the new boards were more empowered to oversee operations while being answerable to the shareholders. The essence of this independence was to increase responsibility and accountability while eliminating bureaucratic processes that had proved to be a major impediment for good corporate governance.

The Boards of Directors also exercise absolute control of all affairs directly or through their committees. Part of the problems companies experienced before their collapse emanated from the failure of the board to monitor financial reporting since the non-executive directors oversaw this role. Once this division was abolished, boards became the sole observers of financial reporting to ensure the relevant guidelines were followed. Therefore, the boards of directors exercise absolute control over all financial affairs of companies.

Response of Shareholders to Corporate Collapse

The popularity of the corporate governance principles has grown rapidly after their introduction in 2003.The ASX Corporate Governance Council oversees the enforcement of the specific provisions and works with companies to improve performance and reduce potential collapses. As a result, shareholders have been forced to pay more attention to the framework in all undertakings not only to increase performance but also to avoid possible action. Following the collapse that hit One Tel Ltd in 2001, the subsequent years have witnessed an increased streamlining of activities by embracing diversity (Dakhelalla, 2014). Companies realized that the gender and age imbalance in their composition was abetting failure. Consequently, shareholders resorted to bring about balance and increase the number of women and young people in their structures.

Another response by shareholders is independence in engagement and decision-making. The collapse of Enron and HIH Insurance in 2001 was blamed on the bureaucratic decision-making processes that exposed the companies to possible ill motives propagated by a section of the directors. There was evidence that the decision-making process was marred by people pulling in different directions and this resulted in delayed action to save the companies from corruption scandals. Consequently, upon the introduction of the ASX framework, shareholders streamlined company structures and made them leaner so that there was little space for infiltration by ill-motivated individuals (Dale & Grey, 2005). Part of this resolution culminated in the merger of executive and non-executive directors. Shareholders were now aware of the gravity of the failure to make timely interventions to creeping problems.

The significant corporate collapses prompted companies to strengthen their ethical frameworks and increase compliance with the ASX provisions. The fall of Enron provided one of the biggest corporate shocks across the globe. The company had experienced unprecedented growth within a short span to the envy of many. However, its fall was a huge statement to other businesses. The reasons cited for its collapse pointed to shareholder negligence and less insistence on ethics. Consequently, companies started realizing the value of ethics, organizational culture, and values (Del Brio & Maia-Ramires, 2005). Major companies rushed to assess and revise their codes of ethics so that any loopholes for bad behavior could be sealed. In the same regard, companies increased financial monitoring by the directors so that any embezzlement can be detected early enough to avert a bigger disaster. There was more effort directed at increasing transparency and accountability among all employees.

The Collapse of Companies and Corporate Governance

The collapse of major companies in the US, UK, and Australia was as a result of their failure to adopt good corporate governance principles. Corporate governance framework forms the backbone for all organizational activities with the aim of enhancing ethical behavior and good business practice. Additionally, it abets good relations with the community and other stakeholders in proximity to the organization (Clarke, Dean & Oliver, 2003). Therefore, the failure of companies to comply has negative implications on the long-term wellbeing of entities including potential collapse. Therefore, it is critical for companies to evaluate their principles and make relevant changes from time to time to avoid possible failure.

Enron was a major causality of inability to observe good corporate governance and its collapse can be attributed to that. The energy company was doing well before the structures took a toll on the communication channels and caused a total breakdown (Mallin., et al, 2005). The company eventually went bankrupt since vested interests infiltrated the financial reporting system. The financial statements of the company were under the custody of Ken Lay, and after realizing the accounts were not doing well, he resolved to manipulate them so that they would reflect positively (Swartz & Watkins, 2003). Whereas this can be seen as an individual move, it is pertinent that this was down to the absence of open communication structures that would ease early detection. The CEO deprived the other departments of access to the financial reports over a prolonged period until the company was declared bankrupt. In fact, the fall of Enron had started more than two years back before the eventual collapse.

Australian telecommunication company One Tel also collapsed in 2001 as a result of failure to adopt good corporate governance systems (Monem, 2011). Before its collapse, the company was the 4^th largest telecommunication firm with presence in seven other countries apart from Australia. Studies that followed the collapse revealed that the company collapsed because of the management’s failure to establish robust internal control, communication, management and quality measures. For example, the company failed to regulate the ballooning wage bill and supplier expenses despite spotting the problem in early 1999.The administration continued to roll out to new markets despite the realization that its financial position was weakening as a result of much of the money going to buying licenses at inflated rates. The company was spending more than her competitors oblivious of the repercussions. This culminated in a loss of $291 million by the end of 2001. Therefore, the company was unable to control its expenditure because of the inefficiencies of their corporate governance approach.

HIH Insurance Company also suffered the same fate as other companies which collapsed as a result of failure to adopt good governance policies. The company was put into liquidation in 2001 for failure to settle its debts (Jiangbo, 2012). By the time of its collapse, the company was Australia’s second largest insurer. This development was more shocking and underlined the importance of corporate governance in the country. The company collapsed because of poor financial management stemming out of competition between the major stakeholders. This happened despite the fact that the company had complied with the ASX guidelines but some gray areas were not accommodated (Monem, 2011). One such aspect is the stockholders-debtors equilibrium that checks the flow of financial benefits between them. In the absence of this, there arose conflicts that eventually gave rise to the total disintegration of the company’s factions and paralyzed operations altogether.

Australian betting company Centaur also collapsed in 2012 as a result of poor corporate governance (Stapledon, 2006). The company’s failure came in the wake of a revelation that instead of trading on shares, the company was investing client’s resources in betting. This happened as the company deceived their clients into believing that their accounts were safe and the money used for betting was not theirs. However, when the company eventually went into liquidation, the customers’ accounts were found to be empty with the firm failing to pay them. This is an indication of poor corporate government. It portrays a company that engaged in massive business malpractice. The company turned customer’s savings into theirs and invested in dubious bets. The company’s management failed in all aspects to safeguard the welfare of the clients and in the end sunk in avoidable collapse.

References

Buchanan, B. (2004). Australian Corporate Casualities. In Corporate Governance (pp. 55-79). Emerald Group Publishing Limited.

Clarke, F., Dean, G., & Oliver, K. (2003). Corporate collapse: accounting, regulatory and ethical failure. Cambridge University Press.

Dakhelalla, R. F. (2014). The impact of corporate governance principles on board characteristics: an Australian study.

Dale, L., & Grey, K. M. (2005). Australian companies and Sarbanes-Oxley: Governance regulation in a parallel universe. Keeping Good Companies, 57(5), 284.

Del Brio, E. B., & Maia-Ramires, E. (2005). Corporate governance mechanisms and their impact on managerial value.

Jackling, B., & Johl, S. (2009). Board structure and firm performance: Evidence from India’s top companies. Corporate Governance: An International Review, 17(4), 492-509.

Jiangbo, X. U. HIH Insurance Limited: Corporate Governance and Corporate Excesses.

Mallin, C., Mullineux, A., & Wihlborg, C. (2005). The financial sector and corporate governance: the UK case. Corporate Governance: An International Review, 13(4), 532-541.

Monem, R. (2011). CEO quality, corporate governance, and CEO compensation.

Monem, R. (2011). The One. Tel collapse: lessons for corporate governance. Australian Accounting Review, 21(4), 340-351

Stapledon, G. (2006). 15 The development of corporate governance in Australia. Handbook on International Corporate Governance: Country Analyses, 170.

Swartz, M., & Watkins, S. (2003). Power failure: The inside story of the collapse of Enron. Crown Business.