major corporate government failures

1. MAJOR CORPORATE
FAILURES

2. • Governance flaws develop gradually over an extended period of time.
• It is unlikely that governance fails suddenly or abruptly and leads to immediate liquidation.
• If governance flaws are relatively slow to develop , directors, managers, auditors, creditors
and regulators have the opportunity tosspot the problem and take corrective actions.
• Results from a 2002 McKinsey survey indicate the following :
• 21% corporate failures had no mechanism for assessing executive compensation practices
• 37% has no CEO succession plan in place
• 19% had no formal plan for dealing with risks
• 60%felt their companies should, but did not , have formal board evaluations
• 39% did not observe internal auditors and 28% did not observe chief legal counsel
• 43% directors were dissatisfied with board oversight of external counsel
• 25% did not want to serve again due to liability concerns

3. • Why good corporate governance is essential?
• A study of cases of collapse of large companies in US,UK, Europe etc

4. American Railroad Company (Penn CentralTransportation , USA
• 1968-1970
Major causes
• Derailment and wrecks became frequent,
• Operating costs rose,
• Company tried to diversify into real estate
and non-railroad ventures but failed again
due to slow economy,
• Mgmt insisted on paying dividends to
shareholders to create illusion of success,
• Company borrowed more and more to keep
operating,
• Interests on loans became unbearable
financial burden.
Consequences
• Declared bankrupt in 1970
• Largest bankruptcy in American history at
that time
• Major reason – management failure
• Congress nationalised Penn Central under
Railroad revitalisation and regulatory
reform act of 1976.

5. First Executive Corporation - Junk Bond
Scam, USA
• 1969-1991
• Issue – fake transactions
• Largest failure in history of life
insurance industry.
• Co. was most aggressive purchaser of
junk bonds throughout 1980s.
• In 1991, FE was involved in a number of
federal and state stockholder lawsuits,
charging entrenchment,
mismanagement and misstatements.
• Company was reprimanded for sloppy
record keeping during 1980s that
prevented any accurate determination
of company reserves.

6. Polly Peck International, UK
• 1980-1991
• Issue – overexpansion and mounting
debt
• Company expanded rapidly before it
collapsed in 1991 due to high debts
raised for acquisitions.
• Consequence
• In 1994, Ahmet Nazif Zorlu acquired PPI
and many PPI subsidiaries were taken
over by their management or sold to
larger competitors.

7. Bank of Credit and Commerce
International, Pakistan / UK
• 1972-1991
• Causes of failure
• Overexpansion, unauthorised deals,
illegal transactions, poor regulation
• Consequences
• Gvt of Abu Dabhi took over BCCI in
1994 after the scandal broke and agreed
to pay $1.9 billion to the depositor’s
pool.
• BCCI creditors also instituted $1 billion
suit against bank of England as a
regulatory body.
• To date only 75% of creditors money
has been recovered

8. Harshad Mehta Stock Scam, India
• 1992
• Causes – diversion of funds to the tune of Rs
4000 crore from banks to stock brokers
between April 1991 to May 1992
• Fraudulent transactions and unethical
behaviour
• One of the first scams to have shaken the
Indian stock market
• Mehta siphoned off huge sums of money
from several banks and millions of investors
were cheated taking advantage of the
loopholes in the banking system.
• Consequnces
• Indian stock market crashed
• Harshad Mehta banned from trading in
stock market
• Charged with 72 criminal offences
• Rigorous imprisonment and untimely death
in prison itself leaving many litigations still
pending against him.

9. Daewoo group, Korea
• 1967-1999
• Causes – Fraud, misreporting of financial statements, lack of proper controls,
failure of external audits
• Consequences – bankruptcy , liquidation, partial reorganisation, CEO fled the
country, Korean govt charged more than 20 senior Daewoo executives with $ 2
billion fraud (were found guilty and imprisoned) , govt assumed control of Daewoo
and ultimately dissolved the conglomerate.

10. Akai Holding Company, China
• 1980-2000
• Causes – management looted the
company by redirecting the assets and
defrauding the investors and creditors.
• unethical behaviour on part of
management, Ernst and young used
fraudulent documents in audit work for
Akai, they did not perform sufficient
checks on Akai’s asset suggesting Ernst
andYoung Hong Kong auditors may
have been involved.
• Consequences
• Declared bankrupt in 2000 owing
creditors $1.11 billion
• James ting disappeared but found later
and jailed for false accounting
• In 2009 Ernst and young Hong Kong
sued for negligence and had to pay
$400 million after proven guilty.

11. SwissAir , Switzerland
• 1930-2001
• Highly under debt – 19billion swiss
francs
• Expansion without thorough analysis
• Flwed strategy
• Misreporting of financial statements
• Consequences
• Board members dismissed
• CrossAir took over swissAir
• Cross Air later taken over by German
airline Lufthansa.

12. Xerox Corporation, USA
• 1906-2002
• Causes – xerox auditor KPMG permitted the
company to cook the books to fill a $ 1.4
billion gap in pre-tax earnings
• Non disclosure of true and fair view of the
state of affairs and operating results of the
corporation
• Consequences
• The securities exchange commission of US
filed complain against Xerox for deceiving
public through accounting frauds.
• Xerox paid $ 10 million penalty
• 6 accused senior executives settled issues
with SEC and paid $22 million in penalties.
• Xerox began to transform itself later and
came to be known asThe document
company.

13. Normura , Japan
• 1925 – 2004
• Faced 2 scandals – first one erupted in
1991, when it was revealed that the firm
had been compensatingVIP clients for
losses incurred during the 1990s crash.
• Secondly, Normura was lending funds
to members of Japanese underworld.
• Causes- corruption, promoting interest
of gangsters
• Consequences
• 2 managing directors were charged
with violating security laws.
• Normura still has 10,000VIP accounts
but is relatively radical in its structure
and representration

14. Satyam Computers , India
• 1987-2009
• Causes – unethical behaviour, lax board, unconvinced role of independent
directors, questionable role of audit committee, fraudulent audit and accounting
function, insider trading
• Consequences – founder chairman Ramalinga Raju and others were arrested
• CFIO and CBI registered case of forgery and fraud and govt replaced the board in
order to reorganise the company.
• Company taken over by Mahindra and Mahindra

15. Common corporate governance problems
• Lax board
• Fraud
• Unchallenged powers of decision making
• Lack of transparency and inadequate disclosures
• unethical business conduct
• Promoters and senior management involved in cooking the books, accounts and
insider trading
• Failure of external audit
• Lack of proper internal audit
• Questionable role of directors, auditors, rating agencies and regulators.