Understanding Corporate Government Failure - Essay Example

CORPORATE GOVERNANCE by Student’s name Code+ course name Professor’s name University name City, State Date Every company in Australia has a duty of care towards the people living in the environment that they live in. companies are also bound by international accounting standards that requires proper disclosure of financial information to the relevant stakeholders to enable them make appropriate decisions. In some cases, these standards and laws are not followed, and this leads to scandals that affect companies to a great extent. There exist corporate governance rules that are meant to ensure that companies make decisions after appropriate consultations, and the principal-agent relationship is good to enable proper running of the company. When corporate governance is breached, the people who lose most are the shareholders because the value of their shares is adversely affected. The public and the economy in general is also affected because the investors lose confidence in the companies they can invest in. reduction in investment in companies affects the economy of countries negatively, and this is why it should always be avoided. This paper evaluates a case of corporate governance breach in Australia. The company under study is James Hardie Limited. James Hardie Limited is a company that specializes in the production of construction materials in the region. It was initially part of James Hardie Group which was the major company. The corporate governance scandal can be traced back to the period the company "James Hardie Group" existed. During the time, claims arose that alleged that some of the products James Hardie Group produced had adverse effects to the society. This included the employees, the people using the materials and the people living in the environment. The products were also believed to be polluting the environment in various ways. When the claims against the company increased with time, the management defense was that the company was no aware of the danger of the asbestos that it was producing. With time, it acknowledged that it was aware of the dangers of the materials and had a program that compensated the affected individuals. As a major company producing the materials in the region, it had the obligation of taking steps to prevent or minimize the harm it caused to people and the environment. James Hardie Group devised a method of evading the compensation to the affected individuals because the number of claims was increasing with time. This is when restructuring of the company was done, and James Hardie Ltd was one of the companies that resulted from the restructuring process. The restructuring process protected the new company from any liabilities arising from the products that were made by the companies. A foundation was formed that was meant to compensate the claims that would arise from the damages caused by the products from the company. The restructuring process involved presentation of financial statements that indicated that the new foundation would meet its obligations. Australian Securities and investment commission realized that the management and other executive members of James Hardie Ltd had prepared wrong financial statements during the restructuring process with the aim of convincing the public that there would be compensation. This manipulation of financial statements was wrong, and the management had to be sued for their actions. The commission however concluded the restructuring process was within the legal framework. Disclosure here was a major failure on the management and had to be punished. The board had earlier assured the public that it had consulted several experts before arriving at the conclusion of restructuring the company. According to the management, the experts also had also agreed with the figures presented in the financial statements regarding the foundation that would compensate the claims. Corporate governance requirements and what was breached Corporate governance requires that the management of companies include the shareholders in making decisions that have a great impact to their companies. To achieve this, there is the need of availing the individuals with the necessary information that is to guide them in the decision-making process. The restructuring process should have been one of the decisions that required the involvement of the shareholders. The shareholders did not give their view on the move by the management and the corporate board. Additionally, the shareholders were not aware of the reason why the restructuring was necessary. Even though the shareholders were informed of the restructuring process, they did not get every detail of the process, and this was unfair to them. Corporate governance requires that a company maintains a clean environment. If it produces harmful products, the company should inform the users so that they have methods that they can use to protect themselves. In cases where there is environmental pollution, there is a need for a company to engage in environmental cleaning activities. This was not the case in James Hardie Ltd. This means that the company did not care of the negative effects that the company caused to the society and its customers. The fact that the company was compensating some affected individuals secretly and failed to admit that its products had negative effects to people shows that the management of the company did not mind about the harm that it caused to the people. For a big company of its level, James Hardie Ltd failed in its corporate social responsibility. Disclosure is another requirement for every company in Australia. The companies are required to prepare accurate financial records that are not in any way misleading to the users. In addition to the financial statements, the companies are required by law to provide any other relevant information that may affect the decision of the users of the financial information. The management of the company failed because the financial statements that were provided relating to the foundation that was to compensate the affected individuals were wrong. An error of more than $1billion cannot be termed as an error considering that the board assured users that the necessary consultations had been done to ensure that the figures were okay. This is evidence that the management engaged in manipulation of data with the aim of hiding important information. From the observations, one concludes that the management was aware of what was happening and instead of correcting its mistakes, it engaged in defrauding activities with the expectations that they would escape their responsibility without any financial implications. This is unfair to the society, customers and the shareholders. The courts fined the executive members of the company for their mistakes. However, there was more harm to the society and the country in general because it means that the trust in Australian companies was lost. Internal control procedures, IT systems and reporting plans and management processes that could have been used to avoid the event Internal controls in the company could have eliminated the event. Since the complaints that related to compensation were recorded, there was a need for them to ensure that the records were well protected and updated every time a claim arose. In such a case, there would be no chances of deleting the records or destroying the same. As such, the accounting officers would easily confirm the total claims that the company owed. If this was achieved, then it means that the foundation would have received proper funding to compensate the individuals who had presented claims. Another internal control would have been documents signed by experts from whom advice was sought. If there were such documents that would then be provided to the shareholders, then these advisers would have shown committed and would have advised the management without any collusion to deceive the shareholders. There should have been internal auditors to evaluate the behavior of the accounting officers and advice the management accordingly about the accounting methods they used. The internal auditors could have helped to minimize any errors in accounting practices, and any detected errors would have been corrected. Independent external auditors could also have helped detect the errors by the company. If this was realized at the correct time, the scandal could have been prevented early enough. IT systems could have been more effective in preventing the scandal. The systems would facilitate recording of claims in such a way that no one could have accessed the same except the relevant parties. The system could have made it difficult to delete any of such records, and the final financial statements would not be erroneous. Management processes jus involve exercising honesty and professionalism in handling all activities in the company. If the top management allowed the accountants to prepare the financial statements, then there would have been no reason to manipulate the data in the statements because it would have been of no benefit to the employees. The management could have also opted to compensate the affected individuals in the case and at the same time engage in environment cleaning activities. This could have given all the parties in the environment to take precautions and avoid harm. In conclusion, James Hardie Ltd presents a corporate governance failure that was inhuman and should never have happened. It shows that even though companies have corporate governance policies, many of them do not follow them, and the people who end up being harmed are the society, employees and the shareholders. The government and agencies in Australia should not relent on the mission of ensuring that the companies in the region follow the corporate governance laws and policies. If this is not done, the investment activities in Australia will be adversely affected, and this will be bad to the economy. The investors have to get confidence that their money is used well by the companies they have invested in and that reputation of the companies will never be harmed because this can affect the value of their investment. There is also a need to punish the managers who misuse their powers to mislead the investors and the government with the aim of gaining from their activities. Reference List DU PLESSIS, JEAN JACQUES, MCCONVILL, JAMES, & BAGARIC, MIRKO. (2005). Principles of contemporary corporate governance. Cambridge University Press. http://hdl.handle.net/10536/DRO/DU:30000408. TOMASIC, R., BOTTOMLEY, S., & MCQUEEN, R. (2002). Corporations law in Australia. Sydney, Federation Press. Read More