Effect Of Corporate Governance On CEO Pay-Risk Essay.

Discuss about the Effect Of Corporate Governance On Ceo Pay-Risk.

The main objective of this report involves in the analysis and evaluation of the main events responsible for the liquidation of the three of the major companies of Australia; they are ABC Learning, HIH Insurance and One Tel Phone. The process of liquidation refers to the procedures involved in the winding up the operations of the companies. It needs to be mentioned that it is the responsibility of the liquidators to conduct the operations of liquidation; they are identification of the assets, liabilities and rights of the business organizations along with the payment of the dues of the creditors and others. Every liquidation has some reasons behind them that can be held responsible for the process of liquidation and there is not any exception of this fact in case of these three companies (Iwona, 2014).

The following discussion shows the description of these three companies:

ABC Learning was one of the major business organizations operated in the educational institution industry of Australia and the company was developed in the year of 1988 in Queensland. ABC Learning was enlisted in the Australian Security Exchange (ASX) and the market capitalization of the organization was $AUD$2.5 billion. The company had more than 900 centers throughout the Australia. In the year 2006, with the aim to expand the business operations all over the United States and United Kingdom, ABC Learning invested US$330 million for the acquisition of Busy Bee Group (Kruger, 2012).    

One Tel Phone was one of the major Australian business organizations having operation in the telecommunication industry. The company was established in the year 1995. One Tel Phone started their business operation with the strategy to cater to the needs of their customers with the help of superior quality of telecommunication products and services. The company was able in gaining the position of the fourth largest telecommunication company in Australia with the help of their superior business strategy. Developing a youth-oriented business organization by selling mobile phones along with internet services used to be the main aim of the company (Carnegie and O’Connell, 2014).

HIH Insurance was the largest company operating in the Australian insurance industry. The company was established in the year of 1968. With the help of effective business strategy, HIH Insurance was majorly successful in the global as well as Australian expansion during the years of 1997 and 1998. The company was enlisted in ASX. As per the liquidators , at the time of the liquidation, the total amount of loss of the company was $5.3 billion and it is also considered as a major reason for the collapse of HIH Insurance. The liquidation of HIH Insurance contributed to the conviction of many of the senior level employees. For all these reasons, the collapse of HIH Insurance is considered as the largest collapse in the world (Betta, 2016).  

Reasons for Liquidation

                The following discussion shows the major reason for the collapse of these three companies:

1. Certain major reasons were reasonable for the collapse of HIH Insurance and the acquisition of FAI Insurance by the company can be considered as a major reasons. The company had to make a large investment for this acquisition that was harmful for the company. This deal caused major damage for the business of HIH Insurance (Shukla, 2015).
2. This same thing happened when the company took the decision to enter into the business of financing the movies. This risky investment caused HIH Insurance more than hundred million of loss.

• The natural disaster in Florida was another major reason for the fall of HIH Insurance. Due to the occurrence of this situation, the company had to incur huge amount of debt to revive the business that led to the major business loss of HIH Insurance.

1. It can be seen that HIH Insurance made a sudden change in the accounting policy for the payment of the compensation for the employees of California. This aggressive accounting policy is considered as another major reason for the collapse of HIH Insurance (Ahmed and Ndayisaba, 2016).
2. According to the estimation of the liquidator, within a period of six months, HIH Insurance lost almost $800 million due to some of the major reasons like quick expansion, complex business structure, unsupervised delegation of authorities and others.

1. In case of One Tel Phone, it can be seen that the strategy of the company was show increased amount of profit in the financial statements by deferring the business expenses for three years. It needs to be mentioned that this aspect led to the violation of the accounting standard and rules (Kang et al., 2013).
2. As a result of the adoption of this wrong accounting policy, One Tel Phone had to face a loss of $291 million in the year 2000 due to the violation in the required accounting policies. This aspect affected the share price of the company as the share price fall under the price of $1.

• In the year 2001, the management of One Tel Phone felt the shortage in fund for conducting the business operations; and for this reason, the director of One Tel Phone sold million shares of the company at a price of 2.5 million. The administrator report of the company states that the company had to lay off 1400 employees in order to reduce the major business expenses.

1. For all these reasons, the investors and shareholders lost money and One Tel Phone had to make the payment of $92 milling as compensations (Meidl, 2014).

1. There are some of the major reasons for the collapse of ABC Learning. It needs to be mentioned that the company had to incur a debt of $1.8 billion as a result of some of the wrong business decisions. For this reason, in the year 2007, the profit margin of ABC Learning fall by 42% amounted to $37.1 million (Connell, 2013).
2. This aspect affected the share prices of the company due to a 43% fall in the share prices at $2.15 after a low staring of $1.15. Due to the presence of the mounting debts, the management of ABC Learning was forced to sell the stakes of $20 million and $6 million for the amount of $2.7 million. As the company faced failed in disclosing their earnings in for the years 2007 and 2008, the received a trade suspension from the authority.

• In the year 2008, ABC Learning interfered into managerial receivership due to the major increase in the debts.

2. In ABC Learning, major fault can be seen in the accounting for intangible assets. The value for goodwill related to license and other intangible assets was $2.4 billion, but the company only made an impairment of $8.4 million. This aspect led to the 42% fall in profit along with the wrong valuation of cash flows (Fin and McRobert, 2013).

Business ethics is considered as one of the major factors for the success of the companies as it helps the management in the identification of the rights and the wrongs for their business. For this reason, ethics has a major part to play in the development of positive organizational culture that influence e the decision making process of the companies. In the presence of business ethics, the management can select the right course of action for achieving the business objective. Sometime, the businesses have to reject the short cut road for short-term profit in order to be ethical (Tricker and Tricker, 2015). At the same time, the importance of corporate governance cannot be ignored as in the presence of effective corporate governance strategies, companies can monitor all of their business operations in order to eradicate fraud and errors from the business activities. In the presence of business ethics and effective corporate governance, business entities can increase their revenue as well as profitability by increasing the customer base. In the absence of ethics and corporate governance, companies can face different types of difficulties to continue their business operations (Tricker and Tricker, 2015).

The main ethical as well as corporate governance issues that led to the collapses of these three companies can be seen from the following discussion:    

1. The approval from the board of directors is an essential element for the completion of any business acquisitions. However, HIH Insurance did not take the approval from their board of directors for the acquisition of FAI Insurance. Moreover, after the disposal of the shares, the directors of the company abruptly resigned. This whole aspect is the proof of poor corporate governance in the organization (DesJardins and McCall, 2014).
2. The company neither consults nor takes the approval from the board of directors for entering into the business of film financing that was a highly risky business for HIH Insurance. This aspect indicates towards the poor decision making process in the company along with lack of corporate governance.

• The senior management of HIH Insurance did not properly discharge their duties for due care and diligence. This aspect shows lack of ethics in the business operations (DesJardins and McCall, 2014).

1999. The prospectus released by the board of directors had some major material omission. In addition, the company overstated the profit for the years 1998 an 1999. These aspects are proof of the lack of ethics in HIH Insurance.   

1. The non-compliance with the accounting standards and principles was the major unethical function of One Tel Phone that also shoes the lack of effective corporate governance (Weiss, 2014).
2. The administration team of the company did not discharge their duties related to monitor the financial performance of the company. At the same time, the management of One Tel Phone overlooked the risky business areas for their personal benefits. These aspects show lack of ethics in One Tel Phone.

• The failure of the company in the adoption of strong pricing strategy was the result of the poor corporate governance mechanism in the organization (Weiss, 2014).

1. For the liquidation of the business of ABC Learning, the wrong adoption of the accounting policies can be majorly held responsible as it led to the occurrence of fraudulent as well as manipulative activities with the financial aspects of the company. Thus, this whole aspect indicates towards the lack of ethical practice as well as poor corporate governance in the company (Tricker and Tricker, 2015).

Mounting amount of liabilities can be held responsible for the collapses of these three companies. In the year 2007, ABC Learning was required to do the reclassification of some of the current as well as non-current liabilities and the amount was $1.1 billion. This aspect led to the refinancing for the company and the profit for the company decreased by 42%. In addition, liabilities in ABC Learning increased due to the payment of $1.2 billion by ABC Learning for the violation in debt covenant (Clarke and Dean, 2014).

HIH Insurance was not the exception as the capital structure of the company was highly leveraged with long-term loans that increased the burden of liability for the company. In addition, the company had to face a loss of $200 million from the acquisition of FAI for $300 million as the actual price of the deal was $100 million (Miglani,  Ahmed and Henry, 2015).

Due to the continuously rising amount of liabilities, the management of One Tel Phone was involved in hiding the amount off liabilities from the financial statements. In addition, the payment of compensation for $92 million increased the liability of the company that ultimately led to liquidation (Barnes, 2013).  

Ethics and Corporate Governance

Conclusion

From the above discussion, it can be observed that there are three types of issues that lead to the liquidation of the business organizations. They are ethical and corporate governance related events, increase in liabilities and poor decision making related events. In case of the three companies, it can be observed that the managements of these three companies took some of the major wrong business and investment related decisions that contributed to business liquidations. Apart from this, poor corporate governance as well as lack of ethics can also be held responsible. Lastly, the burden of continuously increased liabilities ended up in the liquidation of the businesses.

References

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